Money Markets Ease on Unlimited Dollars Pledge

Reuters ^ | 13 Oct 2008 | Reuters

[BGHater]

Money market rates eased on Monday after Europe's central banks said they would lend commercial banks as much U.S. dollar funding as they need.

In the latest joint bid to thaw frozen money markets the U.S. Federal Reserve, the European Central Bank, the Bank of England and the Swiss National Bank also scrapped their existing dollar auction systems and replaced them with a new fixed rate system.

"Counterparties in these operations will be able to borrow any amount they wish against the appropriate collateral in each jurisdiction," the Fed said in a statement.

"Central banks will continue to work together and are prepared to take whatever measures are necessary to provide sufficient liquidity in short-term funding markets." The Bank of Japan said it would also consider similar measures and the Fed said it would increase its currency swap lines with the ECB, SNB and BOE by an unspecified amount to fund the operations.

The moves were welcomed by traders and had an instant impact as three-month Libor dollar rates fell.

"I think they will be hugely helpful, to be honest and the market has a better feel today," said one London-based money market trader. "Given the fact that they are going to allot whatever you need it should bring levels down particularly at the short end."

One-week, 1-month and 3-month dollar funds are all incorporated in the plan.