Money markets libor falls on scarce demand from europe

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Interbank dollar funding costs extended their declines on Tuesday, reflecting little demand from European institutions for dollar-based funds as lending activity in the interbank market was also scarce. The European Central Bank's three-year loan operations have replenished bank funds with over 1 trillion euros since December and reduced their need to borrow in the short-term interbank debt market, where traders say there is virtually no lending. The three-month London interbank offered rate, which is based on the level banks report they can borrow, declined on Tuesday to 0.47065 percent from 0.47265 percent on Monday. The rate, which is used as a benchmark for interest rate swaps and other rate products, is down from a high of over 58 basis points at the end of the year, though still much higher than the 25-basis-point level that it had traded at in mid-2011."The European entities have plenty of euros now. It's a question of whether they need any dollars to fund their dollar assets," said Jim Lee, head of short-term rates strategy at RBS Securities in Stamford, Connecticut.

EUROPEAN BANKS CUT DOLLAR OBLIGATIONS U.S. money market funds have been stepping back into the market and are lending to more countries at longer maturities after pulling back dramatically last year, leaving French banks grasping for funds needed to fund their dollar-based businesses.

At the same time, European banks have reduced their dollar obligations, reducing their need for funds in the currency. The premium charged to swap three-month euros into dollars in the currency swap market also fell to 54.5 basis points on Tuesday, the lowest rate since last August, reflecting little need for dollar funds. The rate came under extreme stress late last year as European banks struggled to raise the loans, which was one factor behind coordinated action by central banks to offer banks cheap loans.

The largest risk for European banks is if sentiment changes and banks are unable to refinance maturing loans as they come due in the coming month, said Lee of RBS. One headline risk is that Moody's Investors Service currently has 15 of the largest investment banks under review for a ratings downgrade. The rating agency said it expects to conclude the review in mid-May. Bank-to-bank Euribor rates also fell below 0.80 percent for the first time since July 2010. The pace of decline is seen slowing as it heads toward record lows. With the European Central Bank poised to keep refi rates on hold for a while, analysts increasingly see three-month Euribor rates stabilizing around 63 bps - record lows hit in March of 2010. It fell to 0.79 percent on Tuesday from 0.80 percent in the previous session. At record lows, Euribor rates would still offer roughly a 30 bps premium over the overnight Eonia rate, which stood at 0.35 percent in the previous session. The Eonia rate in turn provides a pick-up over the ECB's deposit facility rate of 0.25 percent.