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Dollar swaps widen in sign of rising demand as Q4 nears By Reuters


LONDON (Reuters) – Demand for dollars was on the rise in currency derivatives markets on Wednesday, as the last quarter of the year approached and the greenback rose to 10-month highs against its peers.

Spreads on 3-month Euro-dollar, Sterling-dollar and Dollar-Yen Swaps are at their largest since December 2020. It suggests that non U.S. borrowers will pay higher prices to get access to dollars funds.

A trader from a London bank said that the three-month contracts were now taking advantage of the year’s end turn when dollars are more in demand.

On Tuesday, the three-month euro-dollar basis swap was widened by -22 basis points. This is a significant increase from the -7.5bps levels on Tuesday. But this still remains well below levels of around–90 basisbps reached in March 2020 during the COVID-19 crisis that triggered a rush for dollars.

However, analysts and traders noted that there is no indication of money market stress. This was despite the fact that dollar demand tends increase in the fourth quarter each year. U.S. Banks, which are the major conduit of dollars, have cut lending in an effort to conform with cash reserve regulations.

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But the has surged in recent weeks and is currently at the highest since last November, boosted by signs the Federal Reserve could raise interest rates next year and a jump in U.S. Treasury yields.

Experts predict that dollar strength will persist.

“The basis swap development reflects the impact of one of the biggest dollar positives that are supporting the currency at the moment – the drain of excess dollar liquidity that should continue to boost the currency’s rate and yield advantage,” said Valentin Marinov, head of G10 FX at Credit Agricole (OTC:).

Marinov also said that the movements were linked to the expectation that the U.S. Congress would approve a debt ceiling extension. This will allow the Treasury to borrow further, as the Fed is preparing to end bond-buying.

Marinov said that the combined effect of these developments would drain global excess dollars liquidity and give currency a boost.

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