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FX swap spreads tighten after central banks take coordinated action

By Saikat Chatterjee
FILE PHOTO: Saudi riyal, yuan, Turkish lira, pound, U.S. dollar, euro and Jordanian dinar banknotes are seen in this illustration

By Saikat Chatterjee

LONDON (Reuters) - Currency swap spreads, which have jumped as companies and banks scrambled for dollar funding, eased on Friday after global central banks agreed to increase the frequency of their one-week U.S. dollars credit facility.

Central banks worldwide have already slashed interest rates and pumped billions of dollars into the financial system in recent days to prevent it from seizing up. They announced on Friday that they would increase the frequency of their dollar funding operations to daily from weekly to calm dollar shortage concerns.

A blowout in the spreads of the instruments this week has sent the dollar surging, putting it on track for its biggest weekly rise since the financial crisis in 2008.

A strengthening dollar <=USD> is equivalent to tightening global financial conditions, given its dominance in global commerce. Its 9% gain in the past two weeks has led policymakers to loosen policy to keep the global economy from grinding to a halt.

Analysts say the shift to daily liquidity operations is a big step in normalizing the financial system.

"The enhancement of coordinated USD dollar liquidity operations on 15 March was already a significant step building on the experience of the Great Financial Crisis, but today’s shift to daily operations is unprecedented," said Frederik Ducrozet, strategist at Pictet Wealth Management.

On Friday, some of those pressures seemed to be receding. Swap spreads for the most liquid instruments in euro-dollar <EURCBS=ICAP> and dollar-yen <JPYCBS=ICAP> tightened considerably.

Euro-dollar three-month swaps narrowed from their widest levels since early 2011, the height of the euro zone debt crisis.

Similar tightening moves were seen in yen-dollar swaps and in other interbank lending markets.

The FRA-OIS spread <USDF-O0X1=R>, a barometer of risk in the interbank market, narrowed on Friday to 79 bps from an April 2009 high of 91 basis points.


(Reporting by Saikat Chatterjee; additional reporting by Dhara Ranasinghe; editing by Larry King)