A measure of demand in the $9.5-trillion-a-day foreign-exchange market is signaling renewed appetite for US dollar funding as a spiraling war in the Middle East slams global risk appetite.
Measures of the so-called cross-currency basis – the extra cost investors pay or receive when sourcing dollars overseas instead of the US — show a surge in demand in recent trading for the greenback relative to the Swiss franc, euro, pound and other major currency peers.
“When looking across markets, US dollar-funding conditions are under pressure,” a Danske Bank team including Jens Nærvig Pedersen and Antti Ilvonen said Tuesday. “The main culprit seems a deterioration in risk sentiment that has increased credit spreads and spurred a rise in precautionary demand for dollar funding.”
On Tuesday, the three-month euro basis widened to a level last seen four months ago — implying a greater premium for US funding. The Swiss franc’s own gauge, meanwhile, is now the most negative so far this year. Sterling’s basis, which is still positive, fell to its lowest mark since last June.
While the move came as US funding markets were already under some minor pressure amid a slate of Treasury settlements this week, the demand for dollars was seen most acutely in the currency spot market. Bloomberg’s dollar gauge is up some 1.4% since Monday, in the wake of the US-Israeli strikes on Iran, its largest two-day gain in nearly a year.
“The US dollar is the clear winner here,” said Subadra Rajappa, head of US research at Societe Generale. “In the sense that although Treasuries and equities are falling out of favor, investors seem comfortable holding dollars in this environment, especially relative euro.”
Still, the cross-currency basis is driven by a wide range of factors — from geopolitical shocks to central bank balance sheet policy and global repatriation flows. After the US launched global tariffs last year, various measures of the dollar’s cross-currency basis showed that traders were increasingly unwilling to pay up for dollar funding, particularly vis a vis the euro.
That trend is still intact according to some.
“We have maintained the view that the positive euro basis is structurally here to stay, but the recent price action suggests some near-term resistance to that narrative,” said Jack Boswell, a strategist at Wells Fargo.
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