The European Central Bank said demand for three-month dollar loans surged after it almost halved the cost of the funds in a coordinated action last week with five other central banks including the U.S. Federal Reserve.
The Frankfurt-based ECB will lend $50.7 billion to 34 euro-area banks tomorrow for 84 days at a fixed rate of 0.59 percent. That compares with the $395 million lent in the last three-month offering on Nov. 9 at a rate of 1.09 percent. The ECB also lent five banks $1.6 billion in its regular weekly dollar operation, up from $352 million last week. The ECB doesn’t disclose the identity of the banks it lends to.
Six central banks including the Fed, the ECB and the Bank of Japan cut the cost of emergency dollar loans by 50 basis points on Nov. 30 in a global effort to ease a credit shortage worsened by Europe’s sovereign debt crisis. Yesterday, demand for seven-day dollar loans from the Bank of Japan surged to $25 million from $1 million.
“The reduction in the rate seems to have been enough to reduce the stigma in using the facility,” said Vincent Chaigneau, rate strategist at Societe Generale SA in Paris. “Banks have had a lot of difficulty in raising funding in dollars, but this amount is still much lower than what we had in 2009.”
European banks need dollars to fund their own lending in the U.S. as well as to clients elsewhere doing business in the world’s leading reserve currency. On Sept. 15, global equity markets rallied after the ECB said it would coordinate with the Fed to offer a series of three-month dollar loans to euro-area banks to ensure they have enough of the currency for the rest of the year.
The cost for European banks to fund in dollars fell for a third day today, with the three-month cross-currency basis swap slipping to 109 basis points below the euro interbank offered rate from 119 yesterday. It reached a three-year high of 162.5 basis points before the Fed and ECB move on Nov. 30.
At its meeting tomorrow, the ECB will cut its benchmark interest rate to 1 percent from 1.25 percent, according to the median estimate of economists surveyed by Bloomberg News, ahead of a summit of European leaders expected to outline stricter budget rules for euro nations.