(Refiling in order to remove the MONEY-MARKETS headline tag. Make the slug UPDATE3 instead of UPDATE2)

By Dhara Ranasinghe, Saikat Chatterjee and Gertrude Chavez-Dreyfuss

LONDON/NEW YORK – The price of raising U.S. Dollar funds in the euro Swaps market rose sharply Monday following Western countries imposing sanctions on Russia. This included the blocking of some Russian banks and the SWIFT international payment system.

3 month euro cross-currency swaps were at 38.25 base points. It was the highest point since mid March 2020, when there was a coronavirus pandemic.

This means that investors would pay 38.25 basis points more than interbank rates in order to convert three-month euros to dollars.

This three-month cost for the last Friday was 21 basis point and was 8 basis point a month ago.

Cross currency Swaps are a way for investors to obtain financing in another currency. In this example, a dollar-funded institution could raise euro funds in the euro market and then convert those proceeds to dollar funding obligations through an FX Swap.

“The increase in the Euro-dollar Basis is a sign that dollar funding stress has hit European banks,” stated Antoine Bouvet (a senior rates strategist at ING).

While there is much to be unsure about the impact on financial stability, it seems probable that sanctions will temporarily increase dollar funding costs for foreign banks.

On Monday the Russian ruble plunged to an all-time low against the dollar. This was after the US and other Western countries imposed tougher sanctions on Russian banks, including the blocking of some Russian bank accounts from SWIFT’s international payment system.

Analysts claim that blocking Russia from accessing $630 billion of central bank foreign currency reserves will result in dollar funding becoming more expensive for Western firms who had been paid by Russian counterparts.

Kenneth Broux (FX strategist, Societe Generale, OTC:), a London-based FX strategist, said that “if the West doesn’t want or can lend U.S. Dollars and euros to certain Russian enterprises, it means they become scarce and the price of liquidity goes up.”

For Western companies it may mean that central banks might have to supply dollar and euro liquidity.

The following estimates were made by Credit Suisse (SIX) Russia has about $300 billion of short-term money market instruments. This includes $200 billion in FX Swaps, and $100 billion via public and private deposits.

U.S. financial markets are being flooded with concerns over the Russia-Ukraine War.

On Monday, the spread between U.S. three-month forward rates and three-month overnight swap rates, which is a funding stress indicator for financial distress, rose to 18.56 base points, the highest since July 2020.

The gap reached 23.75 basis point in New York’s session early this morning, which was the largest intraday since May 2020. Higher interbank borrowing risk and dollar hoarding are the reasons for the wider spread.

FRA/OIS spread refers to the difference in the 3-month Libor (or the interbank lending rate) and the overnight Index rate. It is also the effect fed funds rate which is the Federal Reserve’s risk-free interest rate.