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Recent Trends in Cross-currency Basis

September 9, 2016
Fumihiko Arai, Yoshibumi Makabe, Yasunori Okawara, Teppei Nagano
Financial Markets Department

The cross-currency basis, which is the basis spread added mainly to the U.S. dollar London Interbank Offered Rate (USD LIBOR) when the USD is funded via foreign exchange (FX) swaps using the Japanese yen or the euro as a funding currency, has been widening globally since the beginning of 2014. This development is driven by (1) increased demands for U.S. dollars resulting from a divergence in the monetary policy between the U.S. and other advanced countries, (2) global banks' reduced appetite for market-making and arbitrage due to regulatory reforms, and (3) the decrease in the supply of U.S. dollars from foreign reserve managers/sovereign wealth funds against the background of declines in commodity prices and emerging currency depreciations.


Bank of Japan Review is published by the Bank of Japan to explain recent economic and financial topics for a wide range of readers. This report, 2016-E-7, is a translation of the original Japanese version, 2016-J-11, published in July 2016. The views expressed in the Review are those of the authors and do not necessarily represent those of the Bank of Japan.

If you have comments or questions, please contact Financial Markets Analysis Group, Coordination and Market Analysis Division, Financial Markets Department (Tel:+81-3-3279-1111).