Rate for three-month dollar up

Eurozone banks faced increased pressure in money markets on Tuesday after a plunge in Franco-Belgian group Dexia's shares pointed to the risks that a Greek default could cause solvency problems for the region's lenders. Markets were broadly more risk averse after eurozone finance ministers said they were considering making banks take more losses on Greek debt and delayed the next aid tranche for Athens until November.
The London interbank offered rate for three-month dollars, a benchmark rate for unsecured interbank lending set by a panel of 19 banks, rose for the 50th session in a row to 0.38094 percent from Monday's 0.37761 percent. French bank Credit Agricole, perceived as one of the most exposed to the debt crisis in the panel, continued to contribute with the highest rate at 0.4375 percent.
Shares in Greece-exposed Dexia fell more than 20 percent on Tuesday suggesting an expected expansion of the European Central Bank's liquidity facilities would do little to ease interbank stress. "It seems that the increasing risk aversion is now related to the solvency of banks, not liquidity, which is abundant," said Barclays Capital rate strategist Giuseppe Maraffino.
The overnight Eonia euro rate was trading at 1.03 percent compared to Monday's 1.07 percent fixing, while the one-week Eonia was 4 bps higher at 0.98 percent. But the iTraxx senior financials credit default swaps index rose more than 10 basis points to 298 bps, as traders said banks were hedging their counterparty exposure in CDS markets.
Market participants were also placing bets on cross currency basis swaps widening further out along the curve, with longer dates not protected by the recent reintroduction of three-month dollar tenders by the ECB. While the three-month FX swap was steady on the day -albeit at expensive levels of minus 114 bps -, the one-year swap was 2.5 bps wider at -78 bps, and the five-year swap hit its widest in two weeks at -45.75 bps.
Take-up at the ECB's one-week euro tender was slightly higher than expected as well, at 199 billion euros versus 193 billion in a Reuters poll. Euribor futures inched higher, but markets are reluctant to return to fully pricing in a 25 bps cut in ECB interest rates in October after taking back such bets following data last week showing a rise in inflation. ING rate strategist Alessandro Giansanti said if the ECB did cut rates on Thursday, the December Euribor future could rally by 15-20 bps from the current 98.75 level as markets would price in another cut by the end of the year.