US dollar purchases continue. Base swaps more expensive again


Staff member
Thursday will not bring any real relief either, as market participants try to understand the consequences of the precautions taken by governments around the world on the one hand and the impact on the global economy on the other. Asian markets were hit by heavy losses overnight; the KOSPI stock index in South Korea, for example, slumped by over 8%. In Europe, too, equities are again trending negatively. Gold, the supposed crisis currency, remains low valued at prices below $1,500 and the oil price has reached its lowest level since 2002.

The US dollar, on the other hand, remains in demand: the dollar index DXY currently stands at over 102.2 points and demand is unbroken. EUR/USD has fallen dynamically in European trading to prices below $1.0750. A continuation of the move to $1.05 seems possible. The strength of the US dollar as the most important trading currency is causing problems for the real economy, but also for economies in emerging markets. Since debts were often taken out in US dollars, it now costs all the more to service them. Companies that are currently generating hardly any sales due to the imposed closures are covering themselves with cash by selling other assets to service their operating costs and debts. It can take several days or even weeks before government aid measures for the affected companies are approved and then take effect.

The high demand for the Dollar is also affecting the cross-currency basis: After initially looking like a recovery yesterday, the EUR/USD basis has dropped back to almost -100 basis points today. As a result, the cost of acquiring dollars via swaps and hedging foreign currency risks in the U.S. dollar has increased significantly compared to the previous day, especially as bid-ask spreads have widened on forward premiums as well. Until the central banks take appropriate and perhaps even coordinated measures, investors from the euro zone will prefer extremely short maturities for pending hedging transactions in order to keep the negative basis effect in their portfolios for only a short time.

For more on the cross-currency basis, view my threads in the Currency Management section of this forum.