Market dollar funding costs are at two-and-a-half year highs despite last month's accord by the world's top central banks to cut the cost of the US currency to mitigate the impact of the euro zone's debt woes. That has boosted the appeal of cheap dollar funds supplied in central bank operations. The BoJ supplied $9.035 billion in a dollar funding operation expiring on Jan. 6, far more than $13 million in an operation last week for the same duration and double the $4.756 billion in three-month funds also supplied last week. "This shows fund demand is strong. Banks, be it foreign or domestic, need to secure liquidity as they face heightened demand for dollar funds expiring beyond the year-end," said Michiyoshi Kato, senior vice president of forex sales at Mizuho Corporate Bank in Tokyo. "Everyone wants to be rich in cash given risks related to the overseas economy and North Korea." The amount taken, however, was still far less than what that the BoJ supplied in operations after the collapse of Lehman Brothers in 2008, indicating Japanese banks are not yet suffering from funding strains. Financial markets remain on edge about Europe's ability to put a floor under a bond market selloff that is pushing borrowing costs for countries such as Italy and Spain towards unsustainable levels. That has boosted demand for dollars and the cost of borrowing. The London interbank offered rate on three-month dollar funds, the benchmark for dollar borrowing costs, rose to 0.56695 percent on Tuesday, its highest level since July 2009. LESS STIGMA The BoJ views an increase in demand for its dollar operations as a welcome sign that banks feel there is less stigma associated with tapping central bank auctions. But it is on guard for any indication that Japanese banks are facing difficulty raising dollar funds. The dollar-funding operation, under which the BoJ offers unlimited amounts against collateral, had been untapped for more than a year until last month because it typically used to be more expensive than borrowing the greenback in the open market. But reflecting growing market strains, the Federal Reserve, European Central Bank and the central banks of Japan, Canada, Britain and Switzerland in late November decided to reduce the cost of existing dollar swap lines by 50 basis points and extend the size and timing of the lines. The BoJ first offered dollar funds in September 2008 as it joined other central banks in opening the dollar liquidity swap lines with the Fed after the Lehman meltdown. As the use of the swaps tailed off in 2009, the BoJ ended the operations along with swap lines in February 2010. But the world's central banks re-established temporary dollar liquidity swap facilities in May 2010 on heightening strains in European financial markets stemming from the Greek debt crisis.