Money markets react to aggressive selloff, dollar demand soars

April 07, 2025 (MLN): Money markets on Monday began showing signs of strain following an aggressive selloff engulfing global equities, sending various measures of demand for dollars to their strongest in months.

Three-month cross-currency basis swaps, a derivative that reflects non-U.S. demand for dollars, shot to their strongest level for the euro and the pound since late 2023.

Meanwhile, those for the Japanese yen reached their strongest in five months.

The rate of the three-month euro cross-currency basis swap hit -5.375%, its lowest since November 2023.

A more negative number indicates demand for dollars from euro-based investors. A week ago, the swap rate was at 12.5%

U.S. President Donald Trump at the weekend showed no signs of backing down from the widespread tariffs he announced last week that have sent shockwaves across world markets.

China has already retaliated with extra tariffs investors now fear a global recession, as Reuters reported.

"Keep a close watch of the EUR/USD (euro/dollar) three-month cross-currency basis swap," ING strategists said in a note.

Any sharp widening in favor of the dollar (i.e., the interbank market prepared to lend out euros in the swap market at below-market rates to secure dollar funding) would be a sign of trouble.

This could briefly send the dollar higher before the Federal Reserve is forced to step in.

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