Oct. 15 (Bloomberg) -- Dollar money-market rates fell after the European Central Bank, Bank of England and Swiss National Bank offered lenders unlimited U.S. currency for the first time in a coordinated effort to unlock credit markets.

The London interbank offered rate, or Libor, that banks charge each other for three-month dollar loans dropped for a third day, its longest sequence of declines in seven weeks, according to the British Bankers' Association. It slid 9 basis points to 4.55 percent today. The comparable euro rate declined to 5.18 percent. Asian rates also decreased.

``Government participation in the banks along with the huge liquidity operation is flooding the financial system, which is having the desired effect on Libor,'' said David Keeble, head of fixed-income strategy in London at Calyon, the investment- banking arm of Credit Agricole SA.

The freeze in money markets may be thawing as governments earmark as much as $3 trillion to revive bank lending. Libor is used to set the rates on financial contracts linked to $360 trillion, or $53,500 for each person worldwide, including mortgages in Britain, student loans in the U.S. and the debt of companies around the world.

The Frankfurt-based ECB lent banks $170.9 billion for seven days at a fixed rate of 2.28 percent, 180 basis points less than yesterday's comparable Libor. The Bank of England allotted $76.3 billion and the Swiss central bank $7.1 billion at the same rate, also for a week. Separately, the ECB provided $100 billion in overnight cash at 0.5 percent, 100 basis points below the Federal Reserve's target rate of 1.5 percent.

The Libor for one-week loans in dollars fell 25 basis points to 3.83 percent today, according to the BBA.

U.S. Injection

The U.S. said yesterday it will inject $250 billion into banks through preferred stock purchases, with nine already agreeing to participate in the program, as it seeks to reverse a collapse in trust among institutions that is blocking lending. Treasury Secretary Henry Paulson urged financial institutions to start offering cash again to prevent further company failures.

While the cost of three-month dollar loans has dropped in the wake of the measures, it's still 305 basis points more than the Fed's target rate. The difference was a record 332 basis points on Oct. 10. It was 82 basis points on Sept. 15, the day Lehman Brothers Holdings Inc. filed for bankruptcy, and 11 basis points on July 31, 2007, just before the start of the credit squeeze.

`Sentiment Changing'

``Sentiment is changing in money markets,'' said Tomohiko Katsu, deputy general manager of capital markets at Shinsei Bank Ltd. in Tokyo. ``But it's still fragile.''

Libor, set every morning by the BBA, an unregulated group representing U.K. banks, is a barometer of the freeze in credit markets because it reflects financial institutions' willingness to lend to one another. The three-month rate for dollars has risen about 3 basis points since Oct. 8, when the Fed joined with central banks around the world to cut benchmark interest rates by 50 basis points.

The credit crisis has thrown the spotlight on Libor because the BBA publishes the names of contributors and their rates, giving lenders an incentive to underestimate borrowing costs to keep from appearing like they are in financial straits. The Bank for International Settlements said in March that some lenders may have ``manipulated'' rates. Three people familiar with the way the rates are set said last week they have become little more than guesswork since credit markets froze.

Favored By Greenspan

Former Fed Chairman Alan Greenspan said in June that the Libor-OIS spread, which measures the difference between the three-month dollar rate and the overnight indexed swap rate, should serve as a measure for gauging money-market strains.

The spread, which is the premium financial institutions charge each other over what traders predict the Fed's daily effective federal funds rate will average over the next three months to lend cash, was 341 basis points today. It was about 24 basis points in January and 11 basis points in the 10 years prior to August 2007, before the start of the credit squeeze.

Futures trading shows the spread may stay above its long- term average for at least the next two years, signaling banks will remain hesitant to lend, according to Tullett Prebon Plc.

Predictions based on contracts trading in the forwards market, or so-called FRA/OIS spreads, are at 149 basis points for December and about 90 basis points for March. The spread priced to September 2010, as far out as Tullett Prebon provides data, is 32 basis points.

Deposits at ECB

In another sign banks are still wary of lending, financial institutions deposited a record amount of cash with the ECB overnight. Banks lodged 196.1 billion euros ($267 billion) in the ECB's deposit facility at a rate of 3.25 percent, up from 182.8 billion euros on Oct. 13. They also borrowed 19.6 billion euros from the ECB at the emergency overnight marginal rate of 4.25 percent compared with 17.5 billion euros a day earlier.

The cost of protecting bank debt from default rose for the first time in more than a week today, with the Markit iTraxx Financial index of 25 European banks and insurers rising 5 basis points to 97, JPMorgan Chase & Co. prices show.

Companies cut rates on overnight short-term debt today, while sweetening 30-day yields to entice investors to buy longer-term commercial paper.

Yields on the highest-rated overnight U.S. commercial paper, which companies sell to help pay for day-to-day expenses such as payroll and rent, fell 20 basis points to 1.52 percent, the lowest since Sept. 26. Rates on the debt due in 30 days rose 18 basis points to 4.27 percent, about the highest since January. Commercial paper due in 90 days rose 65 basis points to 4.1 percent.

Asia Rates

In a bid to free up corporate borrowing, the Fed said it may help America's companies by purchasing their short-term debt at rates below those demanded by private investors in the $1.6 trillion commercial-paper market.

Asian rates fell today after Japan pledged to offer as much dollar funding as required and the Hong Kong Monetary Authority said it will use its foreign-exchange reserves to guarantee bank deposits. Hong Kong's three-month interbank lending rate, or Hibor, fell 9 basis points to 4.34 percent today, the lowest in the past week. Japan's overnight call rate dropped 10 basis points to 0.30 percent, below its target for a third day.

To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net; Nate Hosoda in Tokyo at nhosoda@bloomberg.net

Last Updated: October 15, 2008 11:38 EDT