FXstreet.com

FOCUS: Ctrl Banks Pump Dlr Funds Into Mkts But Doubts Remain

 
   By Monica Houston-Waesch and Natasha Brereton 
   OF DOW JONES NEWSWIRES 
 

FRANKFURT (Dow Jones)--Major central banks around the world early Thursday agreed to ply the global money market with extra funds, keeping banking systems liquid as a crisis of confidence slowed interbank lending to a trickle.

The U.S. Federal Reserve, the European Central Bank, the Bank of England, the Bank of Japan, the Bank of Canada and the Swiss National Bank agreed to pump in dollar funds to "improve the liquidity conditions in global financial markets," according to a joint statement.

The U.S. Fed Thursday authorized $180 billion in additional funds under its temporary currency arrangements, which allow other central banks to provide dollar liquidity in their markets.

The $180 billion is made up of expansions of existing swap lines in place for the ECB and the Swiss National Bank, which have now received $55 billion and $15 billion, respectively, on top of their earlier capacities.

The balance of the additions came from the establishment of new swap lines with the BOJ, BOE and BOC, which will be able to supply dollar liquidity worth $60 billion, $40 billion and $10 billion, respectively.

In liquidity injections so far Thursday, the SNB allotted the maximum level of $10 billion in its dollar auction, having received bids worth $10.17 billion. The ECB also saw strong demand, allocating $40 billion, against bids worth $101.7 billion. The BOE received demand for, and allocated, $14.05 billion.

The concerted action addressed acute shortages of dollars in international money markets, which had sent dollar London interbank offered rates higher as banks scrambled for funds.

A number of central banks also injected their money markets with new cash through their regular refinancing operations. The combination of steps went far in stabilizing shorter-term market interest rates.

But many market analysts said it addressed the symptoms and not the heart of the problem gripping markets, where fear of what other banks have buried in their balance sheets has raised suspicions of default risk.

"The intervention does not directly address the key problem seen yesterday, i.e., banks' desire to hoard cash and their reluctance to lend to each other," Morgan Stanley analyst Laurence Mutkin said in a note to clients.

The steps had no substantial effect on longer-term interbank rates, he said: "However, we would expect the CBs to follow up with more domestic spot and term liquidity too, to ensure the whole system stays awash with liquidity."

But European stock markets reacted positively to the news, with small gains. Bank shares led the rises.

At 1113 GMT, the Dow Jones Stoxx 600 Index was up 0.9%, at 260.24. The euro strengthened against the dollar on the news, and is quoted at $1.4493 at 1224 GMT, according to VWD financial data, up from $1.4325 early in European trading, and after hitting an intraday high of $1.4543. Thursday's action extended a series of liquidity injections by the world's big central banks since the beginning of the week. But some saw the measures as amounting to little more than damage control.

"It obviously won't improve the main cause of the problem, the issue of trust and confidence," said Henry Munster, a managing director at Dexia-Bil in Luxembourg.

"The caveat is that the funds provided should be distributed throughout the entire market, otherwise the issue of the proper distribution of liquidity has to be addressed in a different way, through extending the collateral conditions for eligibility assets," he said.

Separate from the concerted dollar operations Thursday, the ECB allotted EUR25 billion in overnight euro funds in a quick tender. Forty-three banks placed bids totaling EUR49.33 billion.

At 1226 GMT, rates on overnight euro funds traded between 4.20% and 4.30%, broadly in line with the ECB's key policy rate of 4.25%.

As part of its weekly repo, the BOE Thursday also reoffered GBP25 billion in extra reserves that it had originally supplied Monday and Tuesday in exceptional fine-tuning open market operations.

The bank saw strong demand at the auction, in which it provided a total of GBP66.2 billion in weekly funds against bids worth GBP202 billion.

-By Monica Houston-Waesch and Natasha Brereton; Dow Jones Newswires; +49 69 29 725 520; nikki.houston@dowjones.com

(Emese Bartha and Martin Gelnar contributed to this item.)

Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http://www.djnewsplus.com/al?rnd=k7jH2fAtuRIiFWKroO9thw%3D%3D. You can use this link on the day this article is published and the following day.

(END) Dow Jones Newswires

September 18, 2008 08:41 ET (12:41 GMT)


Copyright 2008 Dow Jones & Company, Inc.