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Money markets key dollar rate dips on stimulus hopes

* U.S. repo rates fall for a second day * Front-month Eurodollar futures rise * Three-month dollar Libor unchanged By Richard Leong NEW YORK, June 6 The cost for banks and Wall Street to borrow dollars from investors fell on Wednesday prompted by speculation of further monetary easing by the U.S. Federal Reserve and the European Central Bank. Hopes of more stimulus measures from the two major central banks reduced the strain in the dollar funding market as investors last week hoarded cash and low-risk investments rather than lend money to garner higher returns. Still, money market funds and other investors remain anxious about Europe's fiscal problems spiraling into a global crisis, analysts and investors said. "Today there's liquidity but we know that liquidity could dry up quickly, but that's the risk investors have been preparing for the past four years," said Sean Simko, head of fixed income management at SEI Investments Co. in Oaks, Pennsylvania, which has $189 billion under management. Some dollars have been parked in the $1.6 trillion tri-party repurchase agreement market which banks and bond dealers depend on to fund their trades and operations. The overnight rate on repos secured by U.S. government debt was last quoted at 0.21 percent, compared with 0.24 percent late on Tuesday, according to Reuters data. This key short-term rate for dollar funding fell for a second day but remained about 12 basis points above the year's low seen back in mid-April. ECB President Mario Draghi said the ECB will continue to supply unlimited funding to euro zone banks at least until mid-January 2013. On the other hand, he downplayed the idea of another large three-year loan operation for now. The ECB injected more than 1 trillion euros into the banking system since December in a move to help banks to replenish their capital and to rid of soured sovereign investments. In the United States, Atlanta Federal Reserve chief Dennis Lockhart said on Wednesday the U.S. central bank might consider further monetary easing if the U.S. economy weakens due to high unemployment or Europe's debt trouble spills over to these shores. Bets on more Fed stimulus intensified in the wake of last Friday's poor domestic jobs report and the looming end of the Fed's $400 billion Operation Twist at the end of the month. Overnight, the repo rate has stayed higher than what some traders had thought. They had reckoned a seasonal decline in Treasury bill supply in the spring would drive up demand for repos and lower their interest rates. But the Fed's steady selling of its T-bill holdings due to Operation Twist resulted in a heavier supply of debt that Wall Street dealers have to finance, analysts said. Depleting the cash that would otherwise go into repos is the hefty redemption of money market funds since the beginning of the year. Money funds are major investors in repos. Money market fund assets fell $1.83 billion in the week ended June 5 to $2.545 trillion, according to Money Fund Report, a service of iMoneynet. Since end of 2011, money fund assets have fallen $126 billion or 5 percent. If Operation Twist ends as expected and not extended -- as some analysts are predicting, overnight repo rate should fall as banks and dealers will have less Treasury supply to finance. "A lot depends on Operation Twist," said Alex Roever, short-term fixed income strategist at JPMorgan Securities in New York. In the derivatives market, the rates on short-term dollar interest swaps fell, while Eurodollar futures rose, implying traders expect interbank costs for dollar will fall. The two-year swap rate, a gauge of short-term private credit costs in dollars, was down marginally to about 58.5 basis points, while its premium over comparable U.S. Treasuries fell for a third day to 33.25 basis points. Eurodollar futures for 2012 and 2013 deliveries rose 0.5 basis point to 3.5 basis points on the day, implying traders see further central bank actions lowering interbank borrowing costs. Offshore dollar trading picked up on Wednesday after its key hub - United Kingdom - was closed for two days due to market holidays. The benchmark London interbank offered rate on three-month dollars held at 0.46785 percent.

Money markets us cp market grows, ecb expected to cut rates

NEW YORK/LONDON, May 2 The U.S. commercial paper market grew in the latest week, suggesting increased interest in lending to finance inventories and payrolls and appetite to fund short-term corporate debt, Federal Reserve data showed on Thursday. The size of the U.S. commercial paper market grew by $14.1 billion to $939.9 billion on a seasonally adjusted basis in the week ended May 2 from a seasonally adjusted $925.9 billion outstanding a week earlier. Meanwhile, the size of the market without seasonal adjustments grew by $3.9 billion in the latest week to $1.0213 trillion from $1.0174 trillion. Meanwhile, dollar-denominated three-month London Interbank Offered Rates (Libor) fixed at 0.46585 percent on Thursday, which was unchanged on the day. Three-month dollar Libor rates have remained virtually unchanged for over two weeks. Three-month euro Libor rates eased to 0.62286 percent on Thursday from 0.62929 percent Wednesday. Three-month euro Libor has been mostly falling steadily since touching a recent high of 1.56 percent in June of last year. In Europe, money markets stuck to expectations the European Central Bank will cut rates this year after the ECB on Thursday neither signaled further monetary easing nor eliminated the possibility of more stimulus. At a press conference in Spain, ECB President Mario Draghi painted an uncertain picture of the euro zone's economy, saying while it was likely to improve this year there were risks of a decline. He said more time was needed to see the impact of cheap three-year financing on the real economy and that any exit strategy remained premature. Euribor futures gave up gains after the comments, as traders took profit on previously held positions. But by late trade, they had come off their lows as some bought back into the dips. "Hopes for a signal from the ECB that further monetary support is in the cards were dashed today, with the central bank still awaiting the full impact of the measures already implemented and stressing once again the need for fiscal consolidation and structural reforms to foster sustainable growth," said Natascha Gewaltig, director of European economics for Action Economics in London. Data this week painted a bleak picture of the manufacturing sector in the euro zone, while double-digit unemployment fueled concerns that austerity in Europe was choking an already sluggish economy. Euribor interest rate futures fell as much as 3.5 ticks across the 2013 and 2014 strip after Draghi's comments, having traded as much as 2 ticks higher when the press conference started. Alessandro Giansanti, strategist at ING, said the June contract was pricing in a close to 50 percent chance of a 25-basis-point rate cut that month, which was little changed compared to before the press conference. One trader said the worsening economic situation in the euro zone had money markets players betting on more monetary easing from the ECB, be it via a cut in interest rates, in the deposit facility rate or by increasing the maturity on long-term refinancing operations. The ECB injected one trillion euros' worth of cheap three-year cash in December and February, providing highly indebted countries with some breathing space as the excess liquidity helped limit a rise in peripheral bond yields. "The reaction was fairly predictable in that people are happy to be long Euribor futures and as a result, because nothing happened today, the pull-back was bought quite quickly," said the trader. "Today's press conference probably didn't surprise us in that nothing happened in terms of changing the monetary stance, but they certainly didn't close any doors." Eonia forwards were suggesting that the overnight rate be at 0.29-0.24 percent by November compared to 0.34 percent currently. The trader said that suggested a 30 percent chance of a 25-basis-point rate cut by that time.