Short-term dollar funding rates edge up on U.S. debt caution

Reuters

By Emelia Sithole-Matarise

LONDON, Oct 14 (Reuters) - European banks' very short-dateddollar borrowing costs edged up on Monday as the U.S. debt talksimpasse continued, but rates stayed within last week's ranges asinvestors believe a deal will be reached.

U.S. debt markets were closed for the Columbus Day holidaybut the cost of insuring against a default by the world'sbiggest economy rose in Europe after Democrats and Republicsfailed to agree on raising the government's borrowinglimit.

Offshore dollar demand around the world rose last week asbanks sought to tide themselves over a potential liquiditycrunch on or around Oct. 17, when the United States is expectedto hit its borrowing limit.

There has been no sign of strain in the market so far, withshort-term dollar rates way below the panic levels seen twoyears ago when U.S. money market funds cut lending to Europeanbanks at the height of the euro zone debt crisis.

Still, markets are watching the European Central Bank'sdollar tender on Wednesday more closely than ever for signs ofany impact from the U.S. situation.

Friday's expectations that a deal could be reached over theweekend were quashed on Saturday, although Senate leaders saidon Sunday they were optimistic a deal would be reached in time.

Concern has been most evident in the U.S. Treasury market,where very near-term T-bill rates have risen and the forwardexchange markets where non-U.S. banks and investors typicallypay a premium to raise dollars.

One-week euro/dollar basis swap rates edged up to minus 7.75basis points from minus 6.5 basis points on Friday, meaning thepremium charged to swap euros into dollars has risen. Thetwo-week premium was also slightly up at minus 22.75 basispoints, according to prices provided by broker ICAP.

The benchmark three-month rate, was steadyon the day at minus 9 bps, back to the high negative singledigits that prevailed early last week before U.S. debt concernsrattled markets.

This was still less than half the minus 25 bps seen at theend of last year and minus 167.50 in November 2011 at the heightof a previous wave in the euro zone crisis before massivethree-year European Central Bank cash injections cooled thesituation.

"There are some signs of concern but markets seem to beremarkably relaxed, especially in the spot FX market, and therestill seems to be some sort of assumption that a deal will beagreed before that debt ceiling is hit," said Tom Levinson, aforeign exchange strategist at ING.

FOCUS ON ECB DOLLAR TENDER

Markets are keenly awaiting the ECB's dollar tender onWednesday for any signs of strain.

Banks' appetite at these tenders has been marginal over thepast year as their access to U.S. money market funds improved asconcerns about the euro zone debt crisis eased.

Last week, the take-up for 3-month dollar funding was only$112.8 million, and demand for one-week funds was zero. The lasttime banks borrowed over $1 billion was on May 22, when theytook up $1.293 billion of three-month cash.

"What we are seeing is a period where institutions areincentivised to hold on to any liquidity they have and borrowingrates have risen, but this is comparable to year-end effects andnot any of the big disasters we have seen before," said ICAPstrategist Chris Clark.

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