Swap rates in South Korea and Japan show are banks reacting to Europe’s budget crisis by hoarding dollars, the leading currency for trade and finance.
The one-year basis swap, in which two parties exchange floating interest rates for the dollar and the won, widened to minus 152 basis points as of 1:05 p.m. in Seoul from minus 106 basis points at the end of last week. A wider negative rate signals that investors are willing to receive reduced won interest payments to obtain dollars.
“There’s still a huge demand for U.S. dollar funding,” said Robert Reilly, co-head of Asian fixed income and currencies flow business in Hong Kong at Societe Generale SA “There’s an expectation for dollar-Asia to rise. This will last until the European Central Bank takes some political action.”
Investors exchanging yen for dollar funds are accepting interest payments 36 basis points below Libor for the Japanese currency, the biggest discount since November, according to data compiled by Bloomberg. The spread reached a record low of 86 basis points in February last year as the global finance crisis made it harder for Japanese companies to borrow dollars.
The euro slid to a 14-month low yesterday and the Dow Jones Industrial Average dropped the most in a year after European Central Bank President Jean-Claude Trichet resisted taking any new steps to stem contagion. Japanese Finance Minister Naoto Kan said Group of Seven nations will discuss Greece’s fiscal woes in a conference call today after concerns the European debt crisis will spread sparked a global stock rout.
“If we see a reversal today over what we’ve seen in the past three days, then we’ll see a relative calm return,” SocGen’s Reilly said. “But if we have a bad day today, we’ve broken some key ranges and we’ll potentially see some exiting of long-term positions by large real money accounts.”
South Korea’s won fell 1.4 percent to 1,157.3 per dollar after earlier weakening as much as 2.5 percent to 1,169.9, the weakest level since Feb. 9. The yen weakened 2.1 percent to 92.46.
South Korean financial regulators said they are closely monitoring capital flows in and out of the country in the aftermath of yesterday’s sell-off on Wall Street sparked by concern Greece’s debt crisis is spreading. The Financial Services Commission will monitor local banks’ foreign-currency liquidity and borrowing terms on a daily basis, the regulator said in an e-mailed statement today.