Interbank euro funding costs resumed their climb on Thursday on reduced excess liquidity in the system, but benchmark dollar rates fell to a seven-week low after the US Federal Reserve trimmed its growth outlook. The London interbank offered rate for three-month euros climbed to 0.78125 percent, its highest since September 1, and up from 0.77438 percent on Wednesday.
Three-month Libor was fixed lower for the first time in a month on Wednesday after the European Central Bank drained a small amount of liquidity the previous day. That fall was seen as temporary given the general reduction in excess liquidity after banks paid back 442 billion euros in one-year loans to the central bank early this month. Jacq and other analysts expect the upward trend in euro interbank rates to continue in coming weeks and months, spurred by rising bank demand for private funds rather than reliance on the ECB's cheap loans.
European banks have seen easier borrowing conditions on receding fears about heavy losses from loan exposure to debt-laden euro zone countries. Eonia - the weighted average of interbank unsecured overnight borrowing rates - fixed at 0.44 percent late on Wednesday, 19 basis points above the ECB's 0.25 percent deposit rate.
In normal market conditions, EONIA trades close to or a few basis points above the ECB's key refi rate which currently stands at 1 percent. Eonia forwards, traded instruments that indicate where markets believe Eonia rates will be, show Eonia at 0.68 percent by December. Eonia forwards do not reach 1 percent - the current refi rate - until September 2011. As euro interbank rates resumed their upward march, three-month US dollar Libor was set lower at 0.52469 percent, its lowest since May 24 on a dovish view on US interest rates.
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