Strong demand for the relative safety of dollars, needed to bolster balance sheets into year end, saw banks' dollar borrowing triple on Wednesday at the ECB's weekly loan offering, against a backdrop of rising funding costs in the market. A total of 12 banks used the European Central Bank's seven-day dollar swap line, borrowing $5.122 billion - three times the $1.602 billion borrowed at last week's tender.
The surge came two weeks after central banks slashed the cost of accessing the swap line and as the cost of raising dollars from the market rose, making funding via the ECB more attractive. "Until year-end there's an aversion generally to expanding balance sheets so this is exactly the kind of time you would expect market pricing to be unattractive relative to these official tenders," said Laurence Mutkin, strategist at Morgan Stanley.
Dependence on the ECB as a source of dollars has grown as the debt crisis raging in the eurozone has pushed US money market funds to cut back their lending into the currency bloc, spurring the ECB to step up its support for banks. The euro/dollar cross currency basis swap market, which shows the cost of swapping euros into dollars, indicated a rising premium on sourcing dollar funding from the market.
The premium charged on a three-month swap continued to rise, reaching levels last seen at the end of November at around 150 basis points. Demand in the basis swap market was likely to be driven by the need to present healthy balance sheets over year end, said ICAP economist Don Smith.
The Libor benchmark cost of raising three-month funds in unsecured dollar lending markets - only open to the most secure credits in the current environment - jumped to 0.55505 percent. This marked the largest daily increase in more than a year and a half.