Reuters: US Dollar Report: MONEY MARKETS-Dollar funding risk measure improves sharply

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MONEY MARKETS-Dollar funding risk measure improves sharply Mar 21st 2012, 13:40 Wed Mar 21, 2012 9:40am EDT * 3-month euro/dollar FX basis swap at its tightest in 9 months * Seen narrowing further to test pre-crisis range * Curve to flatten; long-end pressured by euro debt issuance By Marius Zaharia LONDON, March 21 (Reuters) - A barometer of dollar funding risk reached its best levels in nine months on Wednesday and looked likely to improve further on the back of rising confidence in the global economic outlook. The three month euro/dollar cross currency basis swap , which shows the rate charged when swapping euro interest rate payments on an underlying asset into dollars, narrowed to minus 58 basis points, its tightest since Aug. 2011. The measure, which widens in times of funding stress when investors compete for dollars, has gradually tightened from November's minus 167.5, a level not seen since the aftermath of Lehman Brothers' collapse in late 2008. A raft of good economic data, especially out of the United States, and optimism among some investors about the euro zone sovereign debt crisis have recently given a boost to risk appetite, reducing global demand for safe-haven dollars. "The small gradual recovery trend is still very much in place," said Ian Stannard, head of European FX strategy at Morgan Stanley. "We're now approaching the bottom end of what has historically been the normal range and it looks like we could re-enter that range. If we see narrowing beyond (minus) 50 that would confirm the ... normalisation (of this funding market)." The euro/dollar cross currency basis swap curve was flattening, with longer maturities meeting resistance against further narrowing. For instance, the five-year FX basis swap got stuck around minus 40 basis points for more than a month after narrowing sharply in January. The pressure on the long end comes from companies outside the euro zone taking advantage of better risk appetite and the European Central Bank's massive cash injections to issue debt in euros, which they may then switch into dollars or other currencies. Norway's largest bank DnB, Australia's top phone company Telstra Corp, Swiss engineering group ABB and miner Anglo American are among those to have sold euro-denominated debt in the past two weeks. LONGER-TERM RISKS The flattening trend could continue in the short-to-medium term, analysts said. Longer-term, risks stem from the euro zone sovereign debt crisis and the possibility that upcoming economic data fails to meet expectations. Greece's debt restructuring deal this month is perceived to have been a success but other potential sources of financial market stress from the euro zone are bubbling in the background. Athens may need more financial aid if it fails to implement the reforms agreed under its bailout deal, while Portugal is seen by many as likely to seek a debt restructuring and Spain is on the radar again for failing to meet its 2011 fiscal target. "Big picture, we're not in that bad a place at the moment but the biggest risk remains the growth environment," ICAP economist Don Smith said. "If we were to see the growth outlook deteriorate ... the euro zone sovereign debt crisis, which is ongoing, would then move centre-stage again and investors would become more concerned about the prospects for the single currency." The liquidity glut in the banking system meanwhile continued to push fixings of London Interbank Offered Rates lower. The benchmark three-month Libor rate fixed at 0.72357 percent, down from 0.73214 percent on Tuesday. Link this Share this Digg this Email Reprints

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