Dollar Libor rises, euro at new low

The interbank cost of dollars rose to a five-month high on Monday as the market adjusted to baby steps taken by the US Federal Reserve to normalise the financial system in the wake of the two-year financial crisis. Benchmark dollar Libor rates hit their highest level since late October at 0.28188 percent, and analysts said repo rates had also risen over the last week.
Talk last week that the Fed was ready to raise its emergency lending rate again after the withdrawal of a number of liquidity-providing measures reinforced the view that the only way is up when it comes to US rates. That is despite the Fed reiterating at its meeting last week that it will keep policy rates low for an "extended period".
The daily effective Fed funds rates - a weighted average of overnight trading prices - has risen from an average of 0.12 percent in January and February to between 0.15 and 0.20 percent in recent weeks, according to Societe Generale. "A rising Fed funds rate may be a more concrete development than dropping 'extended' from the FOMC statement," said the bank's Stephen Gallagher.
Traders said the higher rates were not yet attracting lenders to term maturities, with credit lines still reduced to shorter maturities and the flat money market yield curve offering little incentive to lend longer than overnight. Overnight dollar Libor rates edged down to 0.21975 percent.
Fed funds futures which gauge interest rate expectations, fell on Monday. However, the most likely scenario reflected in the futures does not fully factor in a fed funds hike to 0.5 percent until year-end, a view that has prevailed for some time in the market. With three-month dollar and sterling Libor rising, it remains to be seen for how long the equivalent euro rates can continue to mark new lows, especially with almost half a trillion euros of 1-year funds maturing at the end of June. Three-month euro Libor rates marked a new low at 0.58250 percent.
Commerzbank rate strategist Christoph Rieger says it will be notable to see whether banks mark three-month Euribor quotes higher from the end of this month, as the contracts in question move into July. Meanwhile, euro repo activity in term dates slumped last week, broker ICAP said, with daily volumes in one-day maturities running at elevated levels in comparison. This may be due to book tidying ahead of quarter-end, it said.