Dollar funding risk measure improves

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 August 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. 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 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.