Dollar borrowing costs rise

Benchmark interbank dollar borrowing costs edged higher on Thursday with US financial institutions still reluctant to lend dollars to European banks on concern over their exposure to the debt of struggling eurozone states. Although other gauges of money market strains such as euro/dollar cross currency basis swap rates and FRA-OIS spreads showed some signs of stabilising from their worst levels in August, they remained near highs hit in late 2008.
European banking stocks recouped some losses and the cost of insuring banks' debt against default retreated on cautious optimism that Federal Reserve Chairman Ben Bernanke will signal more stimulus for the economy in a much-awaited speech on Friday in Jackson Hole, Wyoming. However, London interbank offered rates for three-month dollars rose to 0.31900 percent from 0.31428 percent, their highest rate since last August. Equivalent euro-priced rates were steady, reflecting the ample liquidity in the banking system as a result of the European Central Bank offering unlimited funding. The dollar rate has been steadily rising as US funds have become increasingly reluctant to lend dollars to European banks on longer than an overnight basis.
France's Credit Agricole said its access to US money-market funding had been roughly halved as a result of market jitters, to around 25 billion euros. Presenting its second quarter results, the bank said it was however "well-positioned" in terms of liquidity and had alternative sources of dollar funding available. The pressure in broader dollar markets has sent the cost of exchanging euros for dollars in the foreign exchange market to post-crisis highs.
The three-month euro-dollar cross currency basis swap, which measures the premium banks have to pay to swap euros into dollars, was at minus 83.25 basis points from 84 bps on Wednesday. It was under minus 20 basis points in April. Many expect it to remain hemmed in below the minus 110 bps charged by the ECB at its seven-day dollar tender, which a single bank used last week for the first time in 6 months. There was no demand for the swap line this week, easing fears that some banks were being shut out of the dollar market.