* Dollar Libor extend gains, 3-mth euro rate at record low* 3-month yen Libor falls again, 3 bps below dollar Libor * Unwinding of liquidity support lifting dollar rates By Ian Chua LONDON, March 18 (Reuters) - The cost of borrowing dollarsin the interbank money market rose again on Thursday but thebenchmark euro rate fell to yet another record low thanks toample liquidity. With the U.S. Federal Reserve winding down its liquidityoperations and expectations the central bank could increase itsdiscount rate again, interbank rates and other money marketdollar rates have risen. The three-month dollar London interbank offered rateUSD3MFSR= was fixed higher for a sixth straight session at27.1 basis points -- the highest since Nov. 16. See[ID:nEAP000032] for other Libor fixings. "Before, the market was expecting the Fed funds rate to bebelow 15 basis points in the next few months, now it"s morelikely to be around 20 basis points," said Guillaume Baron,strategist at Societe Generale in Paris. Fed funds opened at 0.20 percent, a broker said, comparedwith 0.18 percent on Wednesday. The Fed conducted its last funding operation under the TermAuction Facility in the previous week and has laid thegroundwork to drain some of the $1 trillion in cash it injectedinto the banking system during the global credit crisis. Overnight dollar Libor, however, eased for a second sessionfrom a six-month peak hit on Tuesday, after the Fed this weekrenewed its pledge to keep benchmark rates low for an extendedperiod. In contrast, analysts expect little upward pressure on eurorates until the first drain of one-year funds worth 420 billioneuros due at the end of July, although the benchmark euro Liborrate should start to reflect this by April. Three-month euro Libor EUR3MFSR= was set at a record low58.5 basis points on Thursday. With the worst of the global financial crisis seen over,major central banks are looking to normalise liquidity levelsalthough no one seriously expects any hikes to official interestrates just yet given the still fragile economic recovery. That is helping interest rate sensitive euribor futures<0#FEI:> continue to push higher with many close to contracthighs again. "Bankers are getting the message: ultra-low rates are likelyto be with us for a very long time," said Mizuho strategistNicole Elliott. "Probably not this week but hopefully by month-end we favoura break above the contract high and another rally, hesitating at99.000, then on up to 99.250," she said of the December euriborfutures FEIZ0. Meanwhile, the three-month yen Libor JPY3MFSR= fell to0.24188 percent, extending its decline after the Bank of Japanon Wednesday doubled to 20 trillion yen ($222 billion) the fundsavailable to banks for three-month loans at the policy rate of0.1 percent. The outcome was in line with expectations. The Japanese government was expected to maintain its pressureon the central bank to keep loosening monetary policy as a wayto keep yen rises in check. Three-month yen Libor is now 2.9 basis points below theequivalent U.S. rate, the lowest it has been since mid-August. (Editing by Ruth Pitchford)
Currencies
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