Dollar Funding Costs Drop to 15-Month Low After ESM Ratification

The cost for European lenders to borrow in dollars dropped to the lowest in 15 months after a German court ratified the euro-region bailout fund and a central bank auction attracted fewer bids for the U.S. currency.

The three-month cross-currency basis swap, the rate banks pay to convert euro interest payments into dollars, reached as low as 16 basis points below the euro interbank offered rate, and was minus 17 basis points as of 1:40 p.m. in London. That’s the cheapest cost since June 14, 2011 and compares with minus 22 yesterday, according to data compiled by Bloomberg.

Germany’s top constitutional court backed the European Stability Mechanism, boosting the rally in the swap that has fallen more than 24 basis points since ECB President Mario Draghi pledged to do everything to save the euro. At the ECB’s auction for 84-day dollar loans, 11 banks bid for $3.7 billion compared with 18 lenders getting $9.9 billion on June 20.

“There are certainly signs of reduced dollar funding stresses in Europe,” said Chris Barnes, a cross-currency broker at Gottex Brokers SA in Lausanne, Switzerland. “The ratification of the ESM by Germany has ramped up expectations of ECB bond buying in the short-end and made the swap cheaper.”

The one-year basis swap was at a 15-month low of 23.5 basis points below Euribor, from minus 26 yesterday. A basis point is 0.01 percentage point.

A measure of European banks’ reluctance to make unsecured loans to one another fell to the lowest since June 2011. The difference between Euribor and overnight index swaps, the Euribor-OIS spread, was 16.4 basis points from 17.

Three-month Euribor, the rate banks say they see each other lending in euros, was set at a record-low 0.252 percent, down from 0.255 percent yesterday. The benchmark is derived from a daily survey of banks for the European Banking Federation.

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