Money markets key dollar funding measure rises as ecb loans expire← Homepage
* Euro/dollar 3-month FX basis widens, but move seen brief* Euro interbank rates hit fresh 16-month lows* Deposits with the ECB spike as expectedBy Marius ZahariaLONDON, March 2 One measure of dollar funding costs rose on Friday after ECB loans in the U.S. currency expired, but a glut of cash in the banking system should ensure a falling trend resumes. The three month euro/dollar cross currency basis swap , which measures the cost of swapping euro interest payments on an underlying asset into dollars, hit its widest in five weeks at minus 82 basis points. This follows Thursday's expiry of the ECB's first allotment of three-month unlimited dollar loans on Dec. 7, when banks took over $50 billion."The three-month dollar tender is rolling off, this is why we're seeing the move (wider) today, not because of any inherent market tensions," said UBS currency strategist Geoffrey Yu, adding that he expected the euro/dollar basis to resume its tightening trend soon.
The basis is often used as an indicator of how hard it is for European banks to borrow dollars. The cost shot up to its widest in two years at minus 167.5 bp in late November, before the ECB's first offer of cheap 3-year funding calmed market nerves about the euro debt crisis. Yu said he "wouldn't be surprised" if some European banks swapped into dollars some of the half a trillion euros they borrowed at the ECB's second three-year tender on Wednesday, but the volumes would be low. The three-month interbank dollar Libor rate fixed an touch lower at 0.47575 percent from 0.47970 on Thursday. Equivalent euro rates also fell to 0.86114 percent from Thursday's 0.87893 percent, the lowest level in 16 months, driven down by lower demand for cash after the ECB's massive injection.
DEPOSITS AT ECB RISE Most of the new money ended up back with the ECB, with overnight deposits rising to 777 billion euros from 475 billion euros in the previous day, when the ECB cash entered the system.
The increase is similar to the net additional liquidity after Wednesday's three-year cash tender, which analysts calculate at around 310 billion euros. A persistently high figure in the deposit facility would indicate that the new money is not filtering through to the real economy, as the ECB hopes. The number is, however, unlikely to offer convincing clues on how much money banks are spending on short-dated euro zone government bonds, which rallied sharply after the ECB's first liquidity tender, easing concerns about Europe's debt crisis."Even if they started selling these bonds now, the cash proceeds would still be in the system ... and will still show up in the deposit facility," said Benjamin Schroeder, rate strategist at Commerzbank."Only if somebody withdraws it from the system would you see the number falling."Lending to businesses in the real economy depends on how confident banks are that they will be able to find money in the market, rather than at the ECB, whose support is only temporary, analysts say. But their incentive to test their market access is lower now, given that the system is awash with cash. For instance, volumes used for the unsecured overnight Eonia rate fixing dropped to 24 billion euros on Thursday, compared to 32 billion euros on Wednesday and 39 billion euros on Tuesday.