On Monday, money markets started exhibiting signs of pressure following a severe selloff affecting global stocks, pushing different indicators of dollar demand to their highest levels in months. Three-month cross-currency basis swaps, a derivative indicating non-U.S. demand for dollars, surged to their highest level for the euro and the pound since late 2023, while those for the Japanese yen hit their strongest level in five months, per Reuters.
The three-month euro cross-currency basis swap rate reached -5.375 per cent, the lowest level since November 2023. A larger negative figure signifies a demand for dollars from investors based in euros. Seven days ago, the swap rate stood at 12.5 per cent. Over the weekend, U.S. President Donald Trump displayed no indication of retreating from the extensive tariffs he revealed last week, which have caused turmoil in global markets. China has responded with additional tariffs, causing investors to worry about a worldwide recession.
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"ING strategists mentioned in a note to closely monitor the EUR/USD (euro/dollar) three-month cross-currency basis swap." "Any sudden increase in favour of the dollar (i.e., the interbank market willing to offer euros in the swap market at rates lower than the market to obtain dollar funding) would indicate issues and might temporarily boost the dollar before the (Federal Reserve) has to intervene."
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