Dollar demand surges after US Bank Shares tumble

The currency derivatives market saw a surge in demand for the US dollar on March 10, 2022, with the three-month euro/USD cross-currency swap spread trading at minus 17 basis points - the highest level since December 14, 2021. This increase in demand for cash was due to a wave of risk aversion among investors, caused by the tumbling shares of US banks.

The European Banks Index (.SX7P) is set to record its biggest one-day drop since June 2022, as the region's largest banks saw their shares decline sharply following the decline of banks on Wall Street on March 9.

The cross-currency swap spread, which reflects the cost of swapping one currency for another, is used as an indicator of financial stress in the market. It indicates how much it costs investors to obtain a particular currency, and a higher spread typically reflects an increase in demand for cash.

The surge in demand for the dollar may have been caused by investors seeking a safe haven amid concerns about the economic impact of the Omicron coronavirus variant. The spread may also reflect concerns about tightening liquidity conditions and rising interest rates, which could adversely affect emerging market currencies.

The sharp decline in shares of US banks and European banks may have contributed to the increase in demand for cash. Concerns about the exposure of banks to high-risk borrowers and an increase in bad loans may have prompted investors to hedge their positions and seek safety in cash.

The increase in demand for the US dollar in the currency derivatives market on March 10, 2022, reflects a wave of risk aversion among investors, caused by the tumbling shares of US and European banks. The surge in the three-month euro/USD cross-currency swap spread reflects an increase in demand for cash and may indicate concerns about the economic impact of the Omicron coronavirus variant and tightening liquidity conditions.