Global funds are scrambling for US dollar safe haven!

Is a liquidity crisis coming?

With the spiral escalation of warfare in the Middle East, safe-haven sentiment is surging dramatically in global financial markets. Capital is pouring in at any cost to what currently appears to be the only safe asset... the US dollar.

According to Bloomberg, in the $9.5 trillion-a-day global forex market, the basis swaps—an indicator of USD funding stress—have shown abnormal fluctuations in recent days. This indicates global investors are being forced to pay a higher premium for the USD to obtain dollar liquidity overseas, and precautionary demand for USD is soaring rapidly.

Bloomberg data shows the three-month euro-dollar swap basis has widened to the highest level in nearly four months. The Swiss franc swap basis has fallen to its most negative value since the start of this year. Although the pound swap basis is still positive, it has also dropped to the lowest since June last year. Although these data may sound confusing, the message is clear: whether they hold euros, Swiss francs, or pounds, institutions are currently selling their non-USD currencies to buy USD cash.

Commenting on this phenomenon, Danske Bank pointed out that the main culprit behind the tightening of USD funding conditions is a massive deterioration in risk appetite caused by war. Institutions are now not seeking risk—they want safety and are steering clear of risky assets. This drives them to hoard dollars as a contingency, causing credit spreads to widen rapidly and sharply increasing the cost for companies to borrow in credit markets.

This panic is even more apparent in the spot market. Since the outbreak of war, Bloomberg's dollar spot index has risen 1.4%, marking the largest two-day gain in nearly a year.

Société Générale commented that in the current extreme environment, the US dollar is undoubtedly the absolute winner. Although US Treasuries and the stock market are both being dumped and have lost favor, investors clearly feel safer holding USD cash, especially compared to euro-denominated assets.

However, the market remains divided on the sustainability of this trend.

Wells Fargo takes a different view. They believe that despite recent geopolitical shocks and the price action showing short-term resistance, the structural trend of the euro basis remaining positive may not have fundamentally changed, and recent volatility is more a short-term market reaction to sudden risks.