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Dollar Funding Costs at 3 1/2-Month Low in Europe on U.S. Budget

The cost for European banks to borrow in dollars fell to a 3 1/2-month low after Congress passed a budget bill that avoids a threat to the recovery in the U.S. economy.

The three-month cross-currency basis swap, the rate banks pay to convert euro interest payments into dollars, was 19 basis points below the euro interbank offered rate at 12:45 p.m. in London, the cheapest since Sept. 17, according to data compiled by Bloomberg. The cost has fallen from minus 27 basis points on Dec. 26.

U.S. lawmakers passed legislation averting tax increases and spending cuts due to kick in from the start of the year that could lead to a recession. In Europe, credit rallied after Italian Prime Minister Mario Monti said Dec. 29 he will lead a coalition in the country’s elections next month.

“The move fits with the general risk-on momentum,” said Christoph Rieger, head of fixed-rate strategy at Commerzbank AG in Frankfurt. “The fiscal cliff agreement and domestic events in Europe, such as Monti signaling his willingness to seek another term, help dollar capital move back into Europe.”

The one-year basis swap was 23 basis points below Euribor, the lowest cost to swap since June 2011, from minus 24 yesterday. A basis point is 0.01 percentage point.

Dollar Auction

European lenders bid for $980 million at the European Central Bank’s seven-day dollar facility auction today, compared with $600 million at the 14-day auction on Dec. 19, and $3.26 billion in the seven-day auction on Dec. 12, data compiled by Bloomberg shows.

A measure of European banks’ reluctance to make unsecured loans to one another was little changed. The difference between Euribor and overnight index swaps, known as the Euribor-OIS spread, was 12.2 basis points.

Three-month Euribor, the rate banks say they see each other lending at in euros, was set at 0.188 percent from 0.187 percent yesterday. The benchmark is derived from a daily survey of banks for the European Banking Federation.

Lenders increased overnight deposits at the European Central Bank yesterday to 280 billion euros ($371 billion) from 262 billion euros on Dec. 28.

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