U.S. dollar funding rates fell for the third day on Thursday in Asia, but tighter liquidity in Japan prompted the central bank to resume its cash pumping operations after a one-day pause.

Pledges of more support for money markets by central banks in Europe were helping to ease funding pressures in the U.S. dollar interbank market, with funds trading around 25 to 50 basis points above the Federal Reserve’s target rate, traders said.

While global recession fears, reinforced by Federal Reserve Chairman Ben Bernanke’s dour assessment of the U.S. economy, bludgeoned share markets around the world, money market players took heart from measures taken by central banks.

“I’ve seriously had enough of the bad news flow,” Adam Carr, senior economist at ICAP in Sydney.

Overnight dollar deposits fell to 1.75 percent in Singapore and 2 percent in Kuala Lumpur, traders in the two centres said, from around 2 and 2.2 percent on Wednesday.

“Overnight deposits are softer today. Definitely the concerted injection of liquidity is helping,” a trader in Singapore said.

Short-term dollar funding rates shot up to as high as 10 percent last month after Wall Street bank Lehman Brothers collapsed prompting banks to hoard cash rather than lend it out of fear of more failures. But rates have come down following efforts by authorities worldwide to restore confidence with massive cash injections and plans to shore up banks with hundreds of billions of dollars of public funds.

The Bank of England said on Wednesday it would offer unlimited seven-day dollar loans while the European Central Bank promised unlimited funds in its longer term refinancing operations.

While funding conditions mostly eased in Asia but they remained tight in Japan, prompting the Bank of Japan to inject 600 billion yen ($6 billion) in same-day funds into the banking system.

The central bank skipped its cash injecting operation for the first time in almost a month on Wednesday, instead draining 2.8 trillion yen from the interbank market, as the key overnight rate plunged on improved sentiment as well as technical factors.

On Thursday, the overnight call rate crept up to around 0.50/52 percent from the weighted average rate of 0.348 percent on Wednesday.

Australia’s central bank also injected A$2.788 billion ($1.82 billion) through its daily operation, helping to narrow the key spread between the three-month bank bills and three-month overnight index swaps to 85 basis points from 99 a week earlier.

In India, overnight cash rates (INROND=) fell to 7 percent from 10.00/10.25 percent on Wednesday after the central bank cut banks’ cash reserve ratio by 100 basis points to 6.5 percent in another step to release more cash to the banking system.

China’s central bank refrained from draining funds from the money market via short-term bond repurchase agreements, in an apparent effort to keep ample cash in the money market.

The December eurodollar futures contract rose one basis point to 97.28, implying a 3-month LIBOR of 2.62 percent by year-end.

Overnight LIBOR fixed at 2.14375 percent on Wednesday, slightly down from 2.18125 percent on Tuesday.

Source: http://www.afxnews.com

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