By Saikat Chatterjee
LONDON (Reuters) - Dollar borrowing costs in the foreign exchange swap markets retreated further on Monday, with swap rates against the euro and pound falling to their lowest levels in more than a decade.
These moves indicate recent emergency actions by global central banks have managed to squelch a growing dollar shortage in these markets.
Costs dropped after the U.S. Federal Reserve stepped in, first renewing swap lines with major central banks, then extending similar facilities to other central banks, and finally establishing a new temporary 'repo' facility.
"Policies put in place to settle markets have created new distortions of their own," Natwest market strategists said in a note. "Judging from cross-currency basis swaps, there has been a swing from an acute dollar shortage to an oversupply."
Dollar borrowing rates via the 3-month euro-dollar FX swap
Similarly, borrowing costs against the pound in the 3-month sterling-dollar FX swap market
However the reversal in the currency swaps market was not reflected in other corners of the derivative markets with 2008 financial crisis era indicators such as FRA-OIS spreads
Strategists at the Bank for International Settlements, an umbrella group for the world's central banks, said last week there is a need to ensure dollar funds remain available to firms that are enmeshed in global supply chains and in constant need of working capital.
More broadly, the reduction in dollar borrowing pressures in FX swaps did little to halt the greenback's rise. The dollar index (=USD) was broadly firm on Monday after rising 2.5% last week.
