UPDATE 1-Dollar funding pressures ease as central banks inject liquidity

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By Saikat Chatterjee

LONDON, March 13 (Reuters) – Demand for dollars via currency derivative markets eased on Friday, a sign that the coronavirus-induced economic stress unleashed on financial markets this week may be starting to stabilise.

In a week of mayhem, investors dumped risky assets across the board and fled to safe-haven assets, including U.S. dollars. Traders rushed to secure dollars via currency swap markets in a throwback to the global financial crisis in 2008, when liquidity and counterparty issues became widespread.

Spreads on three-month euro-dollar and dollar-yen swap spreads widened to their highest since 2017 on Thursday, indicating that traders were willing to pay a premium for access to funding.

Those pressures subsided somewhat on Friday after central banks injected billions of dollars globally, but spreads remained elevated compared with recent historical averages.

“While funding pressures seem to have subsided somewhat, FX swap spreads still indicate the dollar remains king in the money markets,” said John Marley, a senior FX consultant at the FX risk management specialist SmartCurrencyBusiness.

Three-month euro/dollar cross-currency basis swap spreads snapped back to 26 basis points after widening to a late-2017 high of 65 bps. Spreads widened by nearly 40 bps on Thursday, the biggest single-day rise since December 2008.

A narrowing spread indicates less demand for dollars. That was also evident in yen/dollar swaps, which narrowed to 73 bps after hitting an end-2017 high of nearly 90 bps.

Euro-dollar swaps widened as much as 160 bps during the European debt crisis in 2011/12 and the 2008/09 meltdown. Most analysts agree that global liquidity is less constrained now.

Weekly data from flow tracking specialist EPFR noted cash saw $136.9 billion of inflows, the largest ever, indicating investors were rushing into liquid assets.

Central banks stepped in to calm frayed markets.The New York Federal Reserve pumped huge amounts of cash into the banking system and the Chinese central bank cut reserve requirements for banks. Australia’s central bank injected an unusually large $5.5 billion into the financial system.

After adding $500 billion on Thursday, the Fed will inject another $1 trillion on Friday in an effort to stop borrowing costs from rising.

Other indicators of market stress also calmed somewhat. Euro LIBOR-OIS spreads and equivalent U.S. dollar spreads, which track interbank funding, pulled back from multi-year highs.

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