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Money Markets Ease on Unlimited Dollars Pledge

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Monday, Oct 13, 2008

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.

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

  • A d v e r t i s e m e n t

“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.

The fixed rate of interest will be set by the banks on the day of operation.

“It’s extremely positive but I think key focus will be what the fixed rate is,” said another trader in London. “The closer it is to the Fed policy rate (1.5 percent) the more positive the market reaction will be. You also have to remember we don’t get our hands on the 84-day one until November 3.”

The move follows top-level meetings over the weekend in Washington and Paris, where policymakers vowed to bring an end to the credit rout which is threatening to tip the global economy into recession.

After several high-profile bank collapses, fear of further failures is paralysing the normal bank-to-bank lending vital for keeping cash in circulation.

Doubts also remain about whether the raft of measures already announced — including historic coordinated interest rate cuts — will help.

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This article was posted: Monday, October 13, 2008 at 11:22 am

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