The premium that European lenders pay to obtain dollar-denominated cash flows increased to a one-year high amid tumbling rates on short-term loans after the European Central Bank cut interest rates last week.
The rate on a three-month cross-currency basis swap between euros and dollars was negative 13.8 basis points, the most negative since May 31, 2013 on a closing basis, according to Bloomberg data. A negative swap rate signals traders are paying a premium to trade euro-based cash flows for comparable flows denominated in dollars.
“The move in the basis swaps simply reflects the fact that participants long of cash euros have so many excess euros to lend,” Stephen Gallo, European head of currency strategy in London at Bank of Montreal, said in a telephone interview. “The swap market is the best place to lend those euros in order to avoid the ECBs new negative deposit rate.”
Money-market yields in Europe are sliding after the ECB announced a range of stimulus measures, including charging lenders to leave cash with the central bank, effective June 11, to stave off the threat of deflation in the euro area. The ECB cuts its deposit rate to negative 0.1 percent.
The Federal Reserve began in December to scale back its monthly bond purchases, known as quantitative easing, and is on course to complete the program in the fall. The ECB, which didn’t announce a bond buying amount its stimulus measures this month.
“If there is any risk of higher U.S. dollar funding costs this year, I would say that we at least have to wait until the Fed’s QE3 program ends and see what global conditions are like when that happens,” Gallo said.