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Banks’ Dollar Funding Costs Decline to Seven-Month Low in Europe

March 6 (Bloomberg) -- The cost for European banks to borrow in dollars declined to a seven-month low as U.S. money market funds increase lending to firms bolstered by cheap European Central Bank loans.

The three-month cross-currency basis swap, the rate banks pay to convert euro interest payments into dollars, was 67 basis points below the euro interbank offered rate at 2:30 p.m. in London, from minus 71 yesterday, data compiled by Bloomberg show. That’s the lowest cost since Aug. 5.

Europe’s credit markets have rallied since December when the ECB started its longer-term refinancing operation of providing banks with three-year loans to avert a credit crunch. U.S. money market funds boosted their holdings of euro-area bank assets by 15 percent on a dollar basis since the end of December, Fitch Ratings said in a Feb. 23 report.

“U.S. money market funds seem to have increased their exposure to European banks which has reduced the need for exchanging euros for dollars through the basis swap and overall confidence is higher due to the ECB’s actions,” said Achilleas Georgolopoulos, a fixed-income strategist at Lloyds Bank Corporate Markets in London.

The one-year basis swap was 54 basis points less than Euribor from minus 55 yesterday. A basis point is 0.01 percentage point.

A measure of European banks’ reluctance to lend to one another fell to the lowest level in seven months. The Euribor-OIS spread, the difference between the borrowing benchmark and overnight indexed swaps, was 57 basis points, from 59 basis points yesterday. It is down from 95 basis points at the start of the year.

ECB Deposits

Lenders increased overnight deposits at the Frankfurt-based European Central Bank yesterday, placing a record 828 billion euros with the ECB, up from 821 billion euros on March 2. That’s the most since the euro started in 1999 as banks redeposited their cash from the second LTRO.

Three-month Euribor, the rate banks say they pay for three-month loans in euros, fell to 0.920 percent from 0.934 percent. One-week Euribor fell to 0.323 percent from 0.328 percent.

The London interbank offered rate, or Libor, for three-month dollar loans was unchanged at 0.475 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

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