The rates that banks charge each other for borrowing three-month dollar funds eased on Friday and a gauge of money market stress was little changed, although worries about the banking sector persisted. Concern about the embattled industry is likely to linger in the lead up to the results of a US bank stress test that would show how much capital any big bank might need to weather the economic storm, should the already recession-bound economy turn down further.
The results will be announced on May 4. "It may slow down or it may accelerate the whole process of the Libor (London interbank offered rate) market healing," said David Keeble, global head of interest rate strategy at Calyon.
The process enters a critical final phase on Friday, when regulators begin discussing their findings with banks. US officials will also outline publicly the process they followed in an attempt to show how rigorous the testing was.
Three-month dollar Libor edged down nearly 2 basis points to 1.07250 percent, while the equivalent rates for euro and sterling were also fixed lower. The premiums that dollar and sterling Libor rates trade over the equivalent Overnight Index Swap rates, or anticipated central bank rates, both eased, but euro widened. A lower premium indicates less stress in the money market.
Another sign that tensions in the market is easing is the recent rise in overnight central bank rates such as the Euro Overnight Index Average.
In Asia, dollar funding markets remained hostage to shifting sentiment in stock markets and broader risk appetite, where better than expected earnings from a few financial players have helped allay some of the anxiety about the US stress tests. Three-month dollars in Singapore crept down to 1.09417 percent from 1.09857 percent on Thursday, inching closer to the 1 percent mark.