Euro, yen swap spreads stabilize, show less demand for U.S. dollars

FILE PHOTO: A U.S. dollar banknote is pictured behind a protective mask, which is widely used as a preventive measure against the coronavirus (COVID-19)

The cost of raising U.S. dollar funds in the yen and euro swaps market stabilized on Thursday, with premiums favoring the other two currencies suggesting that demand for the greenback had receded from earlier in the coronavirus pandemic.

Currency spreads in yen and euro swaps, the two most liquid markets, widened sharply last month as foreign banks and companies scrambled for dollar funding.

A slew of measures from the Federal Reserve last month to ensure there was no global dollar shortage alleviated some funding pressure.

Cross currency swaps and FX swaps allow investors to raise funds in a particular currency from other funding currencies. For example, an institution with dollar funding needs can raise euros in euro funding markets and convert the proceeds into dollar funding obligations via an FX swap.

On Thursday, euro/dollar three-month swaps widened considerably in favor of the euro to nearly 59 basis points EURCBS3M=ICAP, the highest spread since at least 2004.

The yen/dollar three-month swaps also widened in favor of the yen to nearly 19 basis points JPYCBS3M=ICAP.

“With all the actions that the Fed has taken, the most recent one being the creation of a standing repo facility for foreign central banks, all this unprecedented action has created a glut of dollars now,” said Erik Bregar, head of FX strategy at Exchange Bank of Canada in Toronto.

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