Dollar funding costs rise

Dollar funding costs for eurozone banks rose on Monday, heading back towards their highest levels since late 2008, as US banks remained wary of lending to European counterparts in the face of a possible US recession and an intractable debt crisis. Key euro-priced bank-to-bank lending rates inched up as these heightened concerns outweighed downward pressure from excess liquidity and expectations that the European Central Bank will keep interest rates unchanged into early 2012.
Germany reiterated its opposition to issuing a common eurozone bond - seen by many as a lasting solution to the 18-month-old crisis - fuelling investor doubts about regional leaders' ability to control the region's debt problems. Worries about whether the US economy is slipping back into recession and problems some European banks are facing in accessing term funds in the interbank markets have revived memories of the dark days of the 2008 financial crisis when credit markets seized up.
Foreign lenders have built up a healthy buffer of dollar reserves thanks to the US Federal Reserve's ultra-easy monetary policy, but signs have emerged they are drawing down their reserves, forcing them to turn to central banks and to non-traditional sources of dollar funds, such as FX swaps.
The three-month euro-dollar cross currency basis swap, which falls when dollar funding costs for eurozone banks rise, fell to minus 92.5 basis points on Monday from minus 88 bps on Friday. The swap looked set to retest 2-1/2-year lows seen a week ago of minus 96 bps but many analysts expect it to be capped way off record lows below minus 300 bps hit at the time of Lehman Brothers' collapse, supported by weekly dollar loans provided by the ECB.
London interbank offered rates for three-month dollars maintained their upward grind, rising to their highest level in five months at 0.30844 percent. The ECB could offer special three-month dollar funds in addition to the weekly swap lines it offers, he and other analysts said, as it did in May 2010 when Greece's worsening debt woes pushed up dollar borrowing costs for European banks.