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There is talk that officials will take another step up the escalation ladder to combat the continued rise in LIBOR. The three-month rate has doubled now during the European debt crisis.
The Fed has renewed swap lines to provide foreign central banks dollars that they in turn can auction to their members. The problem is that banks are not taking advantage of this source of funding. The most compelling reason seems to be that the punitivive price the central bank want is too much. It is more than double the price that banks can secure funding in the market.
Consequently LIBOR continues to rise. Talk in the market suggests the ECB may cut the punitive rate and make dollar funding cheaper. This of course has yet to be seen. Many market participants do not think that this disruption and potential risk to the economic recovery as well as a new banking crisis (as well as impacting trade finance) can go unanswered by officials.
Fed funds remain at the upper end of their 0-25 bp range. There is some speculation that the Fed may also become more generous with its liquidity provisions.
Rujors Helping Euro Catch a Bid in Early North America
Reviewed by Marc Chandler
on
May 25, 2010
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