Dollar funding costs eased on Thursday with the three-month interbank rate falling below 0.5 percent for the first time in two months and gains in Euro dollar futures implying further declines in the near term. These moves came a day after Fed Chairman Ben Bernanke said the central bank stood ready to ease monetary policy further if the budding US economic recovery withers.
The September Euro dollar futures retested a record high of 99.550 first set in April, while other contracts including the March contract hit all-time highs. Euro zone interest rate futures also rose across the 2010 and 2011 curve with the most actively traded December Euribor futures reaching three-week highs of 98.98.
"Bernanke was relatively dovish and the prospect for a very prolonged period of accommodative monetary policy and even some expectations the Fed could resume quantitative easing is behind this price action," said Patrick Jacq, strategist at BNP Paribas in Paris.
The three-month dollar London interbank offered rate was fixed at 0.49781 percent, the lowest since May 21, while the spread over the equivalent Overnight Index Swap - a gauge of money market stress - fell two basis points to 30 basis points.
Meanwhile, the pace of increase in euro interbank lending rates slowed after banks rolled over more one-week funds earlier in the week, meaning there was a small net addition of liquidity. The three-month euro Libor rate was set a touch higher at 0.81625 percent from 0.81438 percent - the smallest rise in a week. Euro rates have been rising, helped by banks repayment of 442 billion euros of one-year loans to the ECB on July 1 which took a big chunk of excess liquidity from the market. The overnight Eonia rate has climbed as high as 0.55 percent as a result. It was set at 0.528 percent on Wednesday, well above lows of around 0.3 percent seen in the past months.