Dollar swaps widen in sign of rising demand as Q4 nears

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LONDON, Sep 29 (Businesshala) – Demand for the dollar was rising in currency derivatives markets on Wednesday, as the last quarter of the year drew to a close and the greenback hit a 10-month high against its peers.

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Spreads on the three-month euro-dollar, sterling-dollar and dollar-yen swaps were at their highest levels since the end of December 2020, meaning non-US borrowers had to pay a premium to access dollar funds. are ready for.

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According to a trader at a London bank, the move was taken because “three-month contracts are now approaching the end of the year, when there is more demand for the dollar”.

The euro-dollar three-month base swap widened by -7.5 bps to -22 bps on Tuesday, though it is nearly -90 basis bps to the level touched in March 2020, when the COVID-19 crisis triggered a scramble for the dollar. had done. .

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However, traders and analysts said there was no sign of any currency market tension, noting that demand for the dollar picks up in the last quarter of each year. This is often because US banks, the main conduit for the dollar, cut lending to meet cash reserve regulations.

But the dollar index has bounced in recent weeks and is currently at its highest level since last November, fueled by signs that the Federal Reserve may raise interest rates next year and a jump in US Treasury yields.

Many experts believe that the dollar will continue to strengthen.

Valentin Marinov, head of G10, said, “The basis swap growth reflects the impact of the biggest dollar positivity that is supporting the currency at the moment – the withdrawal of excess dollar liquidity that will continue to boost the currency’s rate and yield gains. ” FX on Credit Agricole.

He also linked the move to expectations that the US Congress would approve a debt-limit extension, allowing the Treasury to borrow more, as the Fed prepares to discontinue bond-buying.

“The combined effect of both developments would be to drain the global excess dollar liquidity, thereby boosting the currency,” Marinov said.

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Reporting by Sujatha Rao and Rithvik Carvalho; Editing by Praveen Charu

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