The premiums that investors have to pay to swap euros, pounds,or yen into dollars for three months are close to their highestlevels this year, as measured by cross-currency basis swaps. Whilethere was a slight pullback at the end of July, the squeeze couldhave further to go, as it’s being driven by a wide array offactors.

Demand for dollars is increasing as investors prepare for anexpected ramp up of Treasury bill issuance following a compromiseamong U.S. legislators over the debt ceiling. It’s also beingdriven by increasing bets on policy easing in Europe and the U.K.,which are pressuring the euro and pound, and by Japanese investorslooking to swap yen for dollars to buy overseas assets.

Some Wall Street analysts estimate that the U.S. government maysell $200 billion or more of Treasury bills during August andSeptember. Jefferies economist Thomas Simons said that with limitedcapacity to take on such a large amount of new supply in such anarrow time frame, short-term market rates could face “significantupward pressure heading into the end of the year.”

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