The dollar slumped on Wednesday as a move by major central banks to cut the cost to borrow the US currency and upbeat US economic data drove investors to higher-yielding currencies. The announcement by central banks of developed economies that they were acting to prevent a credit crunch in Europe renewed investor appetite for risk, lifting currencies such as the Australian, New Zealand and Canadian dollars and the euro.
In a joint statement on Wednesday, the US Federal Reserve, the European Central Bank and the central banks of Canada, Britain, Japan and Switzerland said they had agreed to cut the cost of existing dollar swap lines by 50 basis points from December 5, in order to ensure that banks outside the United States have easy access to dollars.
"Removing the risk of liquidity problems increasing further as year-end approaches provides a major relief to financial markets," said Greg Anderson, senior currency strategist at CitiFX in New York. The new interest rate for the swap line will be nearly halved. It will be the dollar overnight indexed swap rate, currently around 8 basis points, plus 50 basis points, which is marginally higher than the dollar three-month Libor fixed at 0.52889 percent earlier Wednesday.
"So this measure shouldn't necessarily result in banks flooding the facility," Anderson said. "It may never get used at all, or only get used by banks that can't access the market for dollar liquidity anywhere close to market prices." Aside from the liquidity provision, upbeat US jobs, factory and housing data also spurred flight out of the safe-haven dollar. In late afternoon trading, the dollar index was down 0.8 percent on the day to 78.365 after dropping to a nearly two-week low of 77.923.
The euro jumped around 2 cents to a session high of $1.35337 and last traded at $1.34380, up 0.9 percent, on pace for its best one-day rise since late October. On the month, however, the euro was down 2.8 percent. In the forwards market where a shortage of dollars has pushed prices to extreme levels, tensions eased somewhat.
The benchmark three-month cross-currency basis swap, a gauge of dollar demand corresponding to the relative premium for swapping euro Libor for dollar Libor, traded at minus 138.500 basis points on Wednesday, retreating from minus 159.50 basis points hit on Tuesday, a level not seen in three years. Wider spreads reflect elevated demand to borrow US dollars in the currency forward market and often support the greenback's spot value against the euro.
The Australian dollar rose almost 3 cents to a two-week high of US $1.0335, extending gains made earlier in the day after China lowered its reserve requirement ratio for banks. The Aussie was last at US $1.0257, up 2.5 percent, on track for its best day since late October. Other commodity currencies such as the New Zealand and Canadian dollars also rose.