Dollar Libor up on Fed move

Dollar interbank rates edged up on Friday after the Fed raised an emergency lending rate, a move seen as a step towards normalising ultra-loose policy which stoked expectations policy rates could go up this year. The increase in the discount rate, the timing of which surprised markets, hit short-term rates on speculation the US Federal Reserve was moving faster than expected to wind down its emergency efforts to fight the financial crisis and recession.
-- First signs of caution over Spanish repo
Meanwhile, there were further signs of tightening credit conditions in the eurozone on concerns over some countries' fiscal positions, raising expectations the European Central Bank will find it hard to unwind its extraordinary measures. The difference in outlook for future interest rates saw the euro fall to a nine-month low against the dollar and December Euribor and Eurodollar prices converge to their tightest since May 2009 as the implied yield spread widened. "While raising the discount rate will not have any tangible impact on the economy, it does send a very powerful message," Societe Generale said in a note.
Implied prospects that the Fed will raise its benchmark overnight lending target by its September meeting rose to 70 percent, from 54 percent before the Fed's announcement. Three-month dollar Libor rates were slightly higher at 0.25194 percent, while equivalent euro rates also edged up to 0.60625 percent. Greek repo remained closed for business this week and analysts said there were signs of caution in the Spanish market.
"The perceived risk of a Greek government default has been pushing Greek general collateral prices wider since mid-November, but it has been the lack of appetite to take on counterparty risk with the natural holders of that debt - Greek domestic banks - that has, over the past month, effectively frozen the market altogether," said ICAP strategist Chris Clark.
Tullett Prebon quoted the one-month German general collateral rate at 0.29/0.27 percent, with the Spanish equivalent at 0.31/0.35 percent. The broker's head of G7 market economics, Lena Komileva, said a tightening in eurozone credit conditions was worrying.