FX

FX Cross-Currency Basis

The premium over interest-rate parity that one currency commands in cross-currency funding — a measure of USD funding scarcity.

Definition

Cross-currency basis is the additional spread (positive or negative) required to borrow one currency against another beyond what interest rates alone imply. A negative EUR-USD basis means EUR borrowers must pay extra to get USD.

Persistent negative basis in non-USD currencies reflects structural USD demand from non-US banks that can't access Fed funding directly.

Why it matters

FX basis spreads are the cleanest read on global USD funding stress. Wide negative basis precedes credit-spread widening and equity volatility.

Worked example

March 2020: EUR-USD 3M basis blew out to −150bp before Fed swap lines were expanded. After swap-line announcements, basis normalized within days.

Frequently asked

What causes persistent negative basis?⌄
Asymmetric demand for USD funding (non-US banks need dollars more than US banks need euros), balance-sheet costs, and regulatory frictions.
How do Fed swap lines fix it?⌄
They give foreign central banks direct USD access at a fixed rate, capping the basis at the swap-line cost.
Is wide basis always a stress signal?⌄
Sustained negative basis is a stress signal; small persistent deviations reflect structural balance-sheet costs.
Why does it matter for credit?⌄
USD-funded EM and non-US issuers reprice when basis widens, transmitting stress to their credit spreads.

Related terms

Dollar Liquidity

FX

Carry Trade

FX

SOFR-OIS / SOFR-EFFR Spread

Rates

EM Fragility

FX

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