Dollar rates extend decline

Interbank dollar funding costs fell on Monday with a benchmark rate reaching its lowest level in four months after recent economic data supported the view that the Federal Reserve would keep rates low for longer. The three-month dollar London interbank offered rate (Libor) was set at 0.31750 percent, sterling at 0.72147 percent, and the euro rate 0.82781 percent.
Some analysts believe dollar Libor can retest lows of around 0.25 percent seen between mid-November and mid-March, having fallen from highs near 0.54 percent in June. In a significant policy shift this month, the Fed announced it would begin using the proceeds from maturing mortgage securities in its portfolio to buy Treasury notes, an effort to prevent monetary conditions from slowly tightening over time. "Given the fact that the Fed could be more aggressive on quantitative easing means there is no stress on liquidity," said Patrick Jacq, strategist at BNP Paribas.
Unlike the Fed, the European Central Bank, which began withdrawing its emergency stimulus support this year, has yet to announce any changes to its plan for a gradual exit given relatively more upbeat economic conditions in the eurozone. Indeed, while banks in core eurozone countries such as Germany and France have become less dependent on ECB funding, those in the periphery have become more reliant since the market repaid a total of 442 billion euros of one-year loans on July 1.
Data last week showed Portuguese banks borrowed a record 48.8 billion euros from the ECB in July, while Spanish banks borrowed 140 billion euros, up from 136 billion euros in June. At this week's liquidity operation, banks are likely to roll over around 12 billion euros of three-month ECB loans, leaving the overall liquidity condition little changed, said Benjamin Schroeder, analyst at Commerzbank.
The euro overnight interbank lending rate, known as Eonia, was fixed at 0.428 percent on Friday, the lowest in the current reserve maintenance period and likely to continue to decline as "liquidity conditions remain stable and banks have front-loaded their reserve requirements," Schroeder added. The overnight rate appeared to have stabilised at these higher levels after a month of sharp spikes following the expiry of the one-year funds. Before that, it was seen usually below 0.35 percent.