MONEY MARKETS-Yen Libor falls below dollar, ECB a focus

* 3-month yen Libor dips below dollar first time since Aug

* ECB's pledges to return to variable 3-mo ops

* But ECB extends unlimited 1-week, 1-month facilities
* Portuguese repo spread widen, Greek repo thinly traded

By George Matlock

LONDON, March 4 (Reuters) - The interbank cost of borrowing
three-month dollar funds edged higher on Thursday while for yen
funds it fell, taking the Japanese currency rate below that of
the greenback for the first time since August.

In Europe, European Central Bank President Jean-Claude
Trichet outlined the first steps to stemming ample liquidity
provisions the bank has made since late 2008.

The ECB will return to ordinary, variable rate, fixed sum
tenders for 3-month loans for banks from April, unwinding some
of the extraordinary help it gave the euro zone economy.

But balancing that move, Trichet also told a news
conference, after the ECB left key interest rate steady at a
record low 1.0 percent, that the bank would lend banks unlimited
amounts in its weekly and monthly operations until at least
October, longer than many analysts expected. [ID:nLDE62307B]

The decision to return to an auction-based approach for its
longer-term lending tenders might encourage banks back to the
ECB's weekly operations.

The change should make it easier for the ECB to reduce the
amount of excess liquidity in the banking system when they feel
it is necessary, according to Lena Komileva, director of G7
Market Economics, Tullett Prebon, London.

But some traders remained sceptical.

"Trichet's announcement about returning to auction for 3
month refi is a surprise and it is premature," said one
Italy-based money market trader.
While variable rate three-month tenders may have less impact
on cash money market rates than some feared, Komileva said, "It
is clear the level of central bank-supported liquidity in the
system will decline, which will lift Eonia and forward rates,
contributing to higher Euribor rates."

Analysts saw little impact on Libor rates from the policy
change.

LIBOR YEN DUCKS DOLLAR

Yen Libor has historically been below dollar Libor and the
crossover may suggest a normalisation in money markets.

That changed in August, making the dollar a more attractive
funding currency for carry trades and hampered efforts to keep
the yen competitive for export markets.

In December, the Bank of Japan introduced three-month funds
at a 0.1 percent rate at an emergency policy meeting, aimed at
depress rates, in the face of government pressure to do more to
fight deflation and following the yen's surge to a 14-year high
against the dollar in late November. [ID:nT0E5B904U]

On Thursday, just ahead of the ECB's rate decision, the yen
Libor JPY3MFSR= was fixed at 0.25063 percent -- its lowest
level since May 2006 -- and the dollar USD3MFSR= rate at
0.25219 percent, according to the latest fixings by the British
Bankers' Association. [ID:nEAP000023].

That left three-month Swiss franc Libor CHF3MFSR= at
0.24833 percent the cheapest among major currencies.

"Evidently, the yen is trending lower while the dollar rate
just hovers around 25 basis points waiting for the day the
Federal Reserve will tighten," said Peter Chatwell, a market
analyst at Credit Agricole CIB in London.

REPO RISKS

While Greece sold 5 billion euros of a new 10-year
syndicated bond, the Greek repo market remained stressed, and so
too did the Portuguese repo market.

"Against this backdrop...Portuguese repo spreads over Eonia
have widened with 1-month repos trading some 10 basis points
above German repos, double the levels seen a month ago and
liquidity is thinning," Komileva said.