MONEY MARKETS-Rise in dollar interbank rates stalls ahead of ECB

* Dollar Libor flat as ECB meeting eyed for more support

* Focus on ECB; liquidity withdrawal expected to slow

* Bond-buying announcement could ease dollar funding tension

By William James and Masayuki Kitano

LONDON/SINGAPORE, Dec 2 (BestGrowthStock) – The recent rise in
dollar interbank rates stalled on Thursday as markets looked to
the European Central Bank’s policy meeting later in the day for
action to ease the euro zone sovereign debt crisis.

Three-month dollar Libor (USD3MFSR=: ) fixed flat at 0.30344
percent, after six daily increases, but showed no let up in
demand for the perceived safety and liquidity of dollar funding
and nervousness over dealing with certain euro zone banks.

Expectation has grown in the market that the ECB will slow
its withdrawal of support for banks and, more recently, that it
could announce changes to the scale of the bond-buying programme
designed to stabilise government debt markets.

“Of course the ECB has to react…the intensifying sovereign
crisis is impacting funding for banks and corporations, which
impairs the credit channel, something that is key for ECB
policy,” said Societe Generale’s chief European economist, Klaus
Baader.

Markets have priced in a more gradual withdrawal of
unlimited, fixed-rate liquidity than had initially been
signalled by the ECB, and the bank is widely seen keeping its
three-month tenders at full allocation. [ID:nLDE6B10EI]

Investor anticipation of an announcement on the bond-buying
programme have seen sovereign bond yields outperform German
debt, tightening spreads from the highs seen earlier this week.
[GVD/EUR]

However, analysts said an announcement on any increase in
the scale of asset purchases was unlikely to come from the ECB’s
latest meeting.

“Ultimately it’s our expectation that fiscal and monetary
authorities in the euro zone will act to avert either a
disintegration of the monetary union, or a more generalised
liquidity crisis,” said Todd Elmer, Citi’s head of G10 strategy
for Asia ex-Japan in Singapore.

But progress has been slow and there is a risk that the
market may be expecting too much too soon from European
authorities — both from the ECB on Thursday and in general over
the next few weeks, Elmer said.

“As we continue to see some of the political back and forth,
this is likely to keep alive the strains we’re seeing in the
market,” he added.

DOLLAR FUNDING

Five-year euro/dollar cross-currency basis swaps
(EURCBS5Y=ICAP: ) — which show the rate charged when swapping
euro interest payments on an underlying asset into dollars —
eased off their lows, rising 4 bps to -37.25 bps, but remained
sharply down on levels seen at the start of November.

An expansion of ECB bond buying may temporarily ease some of
the strains in dollar funding markets, said Desmond Supple, a
rates strategist for Nomura Securities in Singapore.

“The ECB does have the potential to support the calm that
has emerged yesterday,” Supple said.

“The risk is that funding markets don’t normalise until you
see an ease in solvency risks within the euro zone and that is
an issue which is not going to be easy to go away.”

For more on possible policy responses to the debt crisis,
see: [ID:nLDE6B10EI]

MONEY MARKETS-Rise in dollar interbank rates stalls ahead of ECB