MONEY MARKETS-Asia dlr fund costs soften as cbanks support

HONG KONG Wed Nov 5, 2008 1:34am EST

HONG KONG Nov 5 (Reuters) - Money market rates across most of Asia softened on Wednesday as central bank cash infusions and expectations of more interest rate cuts supported liquidity conditions.

Interbank overnight dollar deposits were quoted around 0.2 percent in Hong Kong and 0.7-1.0 percent in Singapore.

This compares with Tuesday's overnight rate of around 0.3 percent in Hong Kong and 0.8-1.0 percent in Singapore.

Hong Kong's central bank injected HK$814 million ($104.4 million) into the territory's interbank market late on Tuesday which pushed down one-month interbank offered rates HKD1MD= to 1.40214 percent down from the previous 1.54000 percent.

Also on Tuesday, Australia's central bank cut interest rates by three quarters of a percentage point to 5.25 percent, an aggressive move which some analysts say the European Central Bank (ECB) and Bank of England could replicate later this week.

Meanwhile, the ECB added a total of $71.442 billion in U.S. dollar liquidity on Tuesday, via an FX swap and its latest offering of dollar funding.

It is also seen cutting rates by at least 50 basis points (bps) on Thursday to 3.25 percent in response to a weakening economy and fading inflation worries.

"The authorities have pulled out all stops to make sure things get going and things have been going in the right direction," said Edward Lee Wee Kok, Asia head of fixed income strategy at Standard Chartered Bank.

"But spreads are still wide -- LIBOR vs OIS, LIBOR vs policy rates. Things have stabilised but not normalised," he said.

Traders said the easing in term money rates was less drastic as the year-end approached and banks remained risk averse.

In a further sign that the global credit crunch is far from over, the ECB said banks deposited a record 280 billion euros at the central bank overnight on Monday, suggesting banks would still rather park cash at the ECB for low returns than lend it out.

Risk aversion lingers even though the U.S. Federal Reserve has launched new currency swap lines with countries including South Korea and Singapore and the International Monetary Fund has announced a financing fund for emerging market economies.

In Asia, three-month dollar deposits were quoted at 3.0-3.25 percent in Hong Kong and 2.70-3.25 percent in Singapore, traders said. On Tuesday the comparable rates were about 15 basis points higher in Hong Kong and in the 2.70-3.30 percent range in Singapore.

"Spreads are coming in but will remain at slightly elevated levels for some time," said Patrick Bennett, rates and forex strategist with Societe Generale. "The first hurdle is the end of the year and after that we will have to wait and see." (Reporting by Umesh Desai and Kevin Yao, editing by Dhara Ranasinghe)

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