Russia Sanctions Raise US Dollar Borrowing Costs in Funding Markets

U.S. dollar banknotes are shown in this illustration taken February 14, 2022. REUTERS/Dado Ruvic/Illustration

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  • Euro currency swaps hit highest level since March 2020
  • Foreign exchange basis swaps on the pound and the yen also increase
  • Russian-Ukrainian war spills over to US financial markets

LONDON/NEW YORK, Feb 28 (Reuters) – The cost of raising U.S. dollar funds in the euro swap market rose sharply on Monday after Western countries tightened sanctions on Russia over the weekend , in particular by blocking certain Russian banks from the SWIFT international payments system. .

Three-month euro currency swaps hit 38.25 basis points, the highest since mid-March 2020, the start of the coronavirus pandemic, as banks and foreign companies rushed to secure funding in dollars.

In other words, investors were willing to pay around 38.25 basis points above interbank rates to exchange three-month euros for dollars.

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Last Friday, that three-month cost was 21 basis points and it was 8 basis points a month ago.

Currency swaps allow investors to raise funds in a particular currency from other funding markets. For example, an institution with dollar funding needs can raise euros in the euro funding markets and convert the proceeds into dollar funding obligations via a foreign exchange swap.

“There are a lot of question marks surrounding the impact of the sanctions on financial stability, but it seems likely that they will temporarily make dollar funding more expensive for foreign banks,” said Antoine Bouvet, senior strategist at ING.

The ruble plunged nearly 30% to an all-time low against the dollar on Monday after Western countries unveiled tougher sanctions on Saturday, including blocking some Russian banks from the international payment system SWIFT.

Analysts said the decision by the United States and its allies to block Russia from using $630 billion in central bank foreign exchange reserves over the weekend would make dollar funding costs costly for Western companies that were paid by Russian counterparties. Read more

“For Western companies, this means central banks may have to provide liquidity in dollars and euros,” said Kenneth Broux, FX strategist at Societe Generale in London.

According to estimates by Credit Suisse’s Zoltan Pozsar, Russia holds about $300 billion in short-term money market instruments: $200 billion in currency swaps and another $100 billion through public and private deposits.

borrowing dollars

The tensions were not limited to the euro funding markets. Borrowing costs in pounds and yen also hit their highest level since March 2020.

Rising borrowing costs hurt trading volumes. A major U.S. bank trade desk said overnight Treasury volumes were below recent averages.

Eurozone government bond trading slowed sharply on Thursday after Russia invaded Ukraine, MarketAxess data showed Friday.

Concerns about the Russian-Ukrainian war have filtered into US funding markets.

The spread between the U.S. three-month forward rate agreement and the three-month overnight index swap rate, an indicator of funding stress, reached 19.14 basis points on Monday evening, its widest since early July 2020

On an intraday basis, the spread was 23.75 basis points, reached early morning in New York, the highest since May 2020. The higher spread reflects higher interbank lending risk or dollar hoarding .

Barclays, in a research note, said that if funding strains escalate, the Fed has put in place several mechanisms that could provide relief to short-term funding markets such as currency swap lines. The Fed maintains permanent currency swap lines with a number of central banks, including the Bank of Japan, European Central Bank, Bank of England, Bank of Canada, and Swiss National Bank.

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Reporting by Dhara Ranasinghe, Saikat Chatterjee in London and Gertrude Chavez-Dreyfuss in New York; Editing by John Stonestreet and Jonathan Oatis

Our standards: The Thomson Reuters Trust Principles.

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