By Saqib Iqbal Ahmed NEW YORK, March 4 (Reuters) - A gauge of dollar-funding stress eased on Wednesday amid rising hopes that the Middle East conflict may prove shorter lived than initially feared, a
Dollar Funding Stress Eases As Middle East Conflict De-escalation Hopes Lift Markets
By Saqib Iqbal Ahmed
Dollar Funding Conditions and Market Reactions
Overview of Recent Dollar-Funding Stress
NEW YORK, March 4 (Reuters) - A gauge of dollar-funding stress eased on Wednesday amid rising hopes that the Middle East conflict may prove shorter lived than initially feared, a day after its sharpest move in six months following U.S. strikes on Iran.
Cross-Currency Basis Swap Rate Movements
The one-year euro cross-currency basis swap rate, which measures the cost of swapping euro funding into dollars for one year, rose to 11.23 basis points on Wednesday from 10.4 the day before, showing easing demand for the dollar.
The basis swap rate falls when dollar demand outstrips supply, and it rises when dollar liquidity becomes more plentiful.
Recent Lows and Market Volatility
The rate fell to a low of 9.5 on Tuesday, its lowest in three months. That followed a 2.6 basis point drop over the prior week, the sharpest such move in six months.
Impact of Geopolitical Developments
Market Response to Middle East Tensions
On Wednesday, the dollar pared recent gains after a New York Times report said Iranian intelligence operatives indirectly reached out to the CIA a day after the attacks even as U.S. officials remain skeptical that either the Trump administration or Iran is prepared for a near-term de-escalation.
Expert Commentary on Financial Conditions
"From what I can see, financial conditions remain loose and price action looks orderly, suggesting that the world’s biggest banks and asset managers are not expecting a systemic liquidity crunch in the near term," said Karl Schamotta, chief market strategist at Corpay in Toronto.
Comparisons to Previous Market Shocks
While the declining rate this week highlighted risk aversion among market participants, it moved less than during other market shocks, including after President Donald Trump's tariff announcement in April.
Michael Brown, senior research strategist at Pepperstone in London, said the movement suggested participants sought safety but the market "was not disorderly or dysfunctional at any stage, nor one where liquidity concerns are present."
"I don’t think this should be a huge worry for investors right now," Brown said.
(Reporting by Saqib Iqbal Ahmed; Editing by Cynthia Osterman)
