The cost of borrowing dollar funds between banks mostly fell on Monday, extending the recent decline following the US Federal Reserve's aggressive interest rate cut to as low as zero a week ago. The three-month dollar London interbank offered rate (Libor) was fixed at around 1.47 percent, the lowest since mid-2004.
While the spread over anticipated central bank rates, or Overnight Index Swap (OIS) rate - a gauge of money market stress - also contracted slightly. "The response to the Fed action last week was quite positive, we've seen quite significant improvements in Libor rates and even Libor/OIS spread, so that'll continue at a gradual pace," said Nick Stamenkovic, strategist at RIA Capital Markets in Edinburgh.
Hot on the heels of rate cuts in the United States and Japan, China lowered its interest rates for the fifth time since mid-September on Monday. December is usually a difficult month for the interbank money market even in normal times as banks tend to hoard cash and cut back lending to boost their balance sheets.
But Libor rates have generally been well behaved this month, thanks to measures taken by governments and central banks aimed at helping the sector weather a global credit crunch.
"In a normal year, you would see an end-of-year panic for dollars. But with the actions of the Fed in the past few months, if anything there is going to be an abundance of US dollars," said a senior money market trader at a European bank in Singapore.
Bank-to-bank lending rates have been trending lower since hitting peaks in October following the collapse of high profile names such as Lehman Brothers, but banks are still very wary of lending to each other.