Cost of Swapping Euro Payments to Dollars Rises for Second Day

The rate banks pay to convert euro interest payments into dollars increased for a second day after paring earlier gains, according to a money-markets indicator.

The three-month cross-currency basis swap widened to 105 basis points below the euro interbank offered rate, from 104.5 yesterday. The rate reached 107 earlier today and was as much as 112.5 basis points under Euribor on Sept. 12, the most expensive since December 2008.

Economic data released today signaled that global growth is stuttering. Consumer spending in the U.S. slowed in August as incomes unexpectedly dropped, German retail sales fell and a gauge of Chinese manufacturing shrank for a third month.

“Investors are putting too much faith in the capability of policy makers to lead the economy forward,” Ciaran O’Hagan, head of European rates strategy at Societe Generale SA in Paris, wrote in a note. “You don’t want to be in the way when governments are found wanting again in their ability to plug budget holes.”

The one-year cross-currency basis swap widened to 70 basis points less than Euribor from 69 yesterday.

A measure of banks’ reluctance to lend to one another in Europe was little changed. The Euribor-OIS spread, the difference between three-month Euribor and overnight index swaps, was 81.5 basis points, Bloomberg data show. The gap reached a 2 1/2-year high of 89 on Sept. 23.

The ECB said financial institutions decreased overnight deposits. Banks left 161 billion euros ($216 billion) with the Frankfurt-based lender yesterday, compared with 173 billion euros Sept. 28 and 197.8 billion euros Sept. 12, the ECB said.

Three-month Euribor -- the rate banks say they pay for three-month loans in euros -- increased to 1.554 percent from 1.550 percent yesterday. One-week Euribor fell to 1.208 percent from 1.220 percent.

The three-month dollar London interbank offered rate, or Libor, rose for a 16th day to 0.374 percent from 0.372 percent, according to the British Bankers’ Association. That’s the highest since Aug. 12, 2010.

The TED spread, or the difference between what lenders and the U.S. government pay to borrow for three months was little changed at 36 basis points.

To contact the reporters on this story: Keith Jenkins in London at kjenkins3@bloomberg.net; David Goodman in London at dgoodman28@bloomberg.net

To contact the editors responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net; Daniel Tilles at dtilles@bloomberg.net

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