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Banks’ Dollar Funding Costs Rise to 8-Week High as Economy Slows

The cost for European banks to borrow in dollars rose to the highest in more than a month after data showed Chinese manufacturing slowed and European output shrank.

The three-month cross-currency basis swap, the rate banks pay to convert euro interest payments into dollars, was 56 basis points below the euro interbank offered rate at 12:46 p.m. in London from minus 50 yesterday, according to data compiled by Bloomberg. That’s the most expensive level since April 10.

As Europe’s two-year debt crisis threatens to engulf Spain and spread abroad by undermining demand and investor confidence, signs of a renewed international slowdown are mounting. A gauge of manufacturing in the 17-nation euro zone fell to a three-year low of 45.1 in May, indicating a 10th month of contraction, while unemployment reached 11 percent, the highest on record.

“We have seen further evidence of a weakening global economy, notably in Chinese and European manufacturing data,” said Chris Clark, an interest-rate strategist at ICAP Plc in London. “Euro-dollar basis prices continue to imply a tightening in dollar funding constraints for the euro zone’s financial sector.”

The one-year basis swap was little changed at 68 basis points below Euribor. A basis point is 0.01 percentage point.

Short-term bank funding rates exceeded longer-term costs in the market for borrowing and lending European government bonds, the so-called repo market. The difference between the one-day euro repurchase agreement and three-month repo rates was little changed at 3.7 basis points, near the widest in three months, European Banking Federation data show.

No Strain

“There is little evidence of real strain in the market which is actually in the process of lowering the volume of dollars it sources through the European Central Bank’s dollar swap facility,” said Clark.

Two banks bid for $500 million in seven-day loans from the ECB on May 30 at a cost of 66 basis points, compared with six banks that got $2.9 billion in loans of the same duration at 63 basis points on March 28, according to the central bank’s data. The Federal Reserve’s swap lines through the central bank offer Europe’s lenders seven-day and three-month loans at low interest rates.

Prices in the forward market for three-month Euribor relative to overnight indexed swaps -- known as the FRA/OIS spread -- was 32.5 basis points from 32 yesterday. An increase signals banks are more reluctant to lend.

The Euribor/OIS spread was 40 basis points from 39 yesterday.

Overnight Deposits

Lenders cut overnight deposits at the Frankfurt-based ECB yesterday, placing 769 billion euros ($949 billion) from 770 billion euros the day before.

Three-month Euribor, the rate banks say they pay for loans over that period in euros, fell to 0.665 percent from 0.668 percent the day before, while one-week Euribor was unchanged at 0.317 percent.

The London interbank offered rate, or Libor, for three-month dollar loans was unchanged at 0.467 percent. The three-month dollar FRA/OIS spread was 47 basis points from 44.5 yesterday.

Three-month Euribor USD, a gauge of dollar funding costs from the Brussels-based EBF, rose to 0.943 percent from 0.930 percent.

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