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Dollar Funding Costs Fall to Six-Month Low in Euro Money Markets

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Feb. 10 (Bloomberg) -- The cost for European banks to borrow in dollars dropped to the lowest in six months as record funding from the region’s policymakers eases borrowing costs, according to a money-market indicator.

The three-month cross-currency basis swap, the rate banks pay to convert euro interest payments into dollars, was 68 basis points below the euro interbank offered rate at 12 p.m. in London, from minus 70 yesterday, data compiled by Bloomberg show. The cost, the lowest since Aug. 5, has fallen from minus 114 basis points at the start of the year.

The cost to borrow in dollars fell for the seventh consecutive week after the European Central Bank allotted 489 billion euros ($639 billion) of loans to 523 lenders in December to avoid a credit crunch in the region’s sovereign debt crisis. A second longer-term refinancing operation, or LTRO, is planned for Feb. 28.

“The fact that there’s another three-year tender in a couple of weeks’ time leaves a lot of the positive sentiment in the market,” said Elisabeth Afseth, a fixed-income analyst at Investec Capital Markets in London. “It’s likely we’ll see a decent take-up of that and a continuation of what we’ve seen now.”

The one-year basis swap was 58 basis points less than Euribor, from minus 56 yesterday. A basis point is 0.01 percentage point.

A measure of European banks’ reluctance to lend to one another held near a four-month low. The Euribor-OIS spread, the difference between the borrowing benchmark and overnight indexed swaps, was 72 basis points in London, according to data compiled by Bloomberg.

Lenders increased overnight deposits at the European Central Bank, placing 496 billion euros with the Frankfurt-based ECB yesterday from 495 billion euros on Feb. 8.

Three-month Euribor, the rate banks say they pay for three-month loans in euros, fell for the 37th day to 1.063 percent, from 1.070 percent. It’s the longest run of declines in 2 1/2 years. One-week Euribor dropped to 0.373 percent from 0.375 percent.

The London interbank offered rate, or Libor, for three-month dollar loans fell to 0.506 percent from 0.510 percent.

To contact the reporter on this story: Katie Linsell in London at klinsell@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net