Global Risks Boost Dollar Demand in Currency Swaps Market

Foreign Exchange Market Update: US Dollar Funding in Demand Amid Global Risk Sentiment Deterioration

The $9.5-trillion-a-day foreign-exchange market is experiencing a surge in demand for US dollar funding, driven by a spiraling war in the Middle East that has slammed global risk appetite.

Cross-Currency Basis Measures Indicate Renewed Appetite for US Dollar Funding

Measures of the cross-currency basis, which reflect the extra cost investors pay or receive when sourcing dollars overseas instead of the US, show a significant increase in demand for the US dollar relative to major currency peers such as the Swiss franc, euro, and pound. The three-month euro basis has widened to a level last seen four months ago, implying a greater premium for US funding. The Swiss franc's own gauge is now the most negative so far this year, while sterling's basis has fallen to its lowest mark since last June.

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US Dollar Gauges See Significant Gains

Bloomberg's dollar gauge has seen a 1.4% increase since Monday, in the wake of the US-Israeli strikes on Iran, marking its largest two-day gain in nearly a year. The US dollar is seen as a safe-haven asset in this environment, with investors comfortable holding dollars despite the decline in Treasuries and equities.

Key Factors Driving Cross-Currency Basis

The cross-currency basis is driven by a wide range of factors, including geopolitical shocks, central bank balance sheet policy, and global repatriation flows. While some analysts maintain that the positive euro basis is structurally here to stay, recent price action suggests near-term resistance to this narrative.

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Key Figures:

• $9.5 trillion: Daily foreign-exchange market size
• 1.4%: Bloomberg's dollar gauge increase since Monday
• 3 months: Euro basis widening to a level last seen four months ago
• -most negative so far this year: Swiss franc's cross-currency basis gauge