UPDATE 1-ECB dollar auction sees low demand, no stress at euro banks
LONDON Oct 9 (Reuters) - Demand for dollars at the European Central Bank's weekly auction on Wednesday was negligible, suggesting euro zone banks are meeting their dollar funding needs with ease even as the U.S. debt ceiling storm continues to swirl.
Wednesday's auction was more closely watched than usual. Offshore demand for dollar cash around the world has risen this week as banks seek to tide themselves over a potential liqiudity crunch on or around October 17, when the United States could hit its borrowing limit.
But the take-up for 3-month dollar funding was only $112.8 million, and demand for one-week funds was zero. The last time banks borrowed over $1 bilion was on May 22, when they took up $1.293 billion of three-month cash.
"The history of this has been pretty close to zero for a while, and it would only have risen if some banks had really short-dated T-bills that were coming due in this period everyone is talking about, and thought there could be some delay in payments from the U.S. Treasury," said a money market strategist at a bank in London.
"So it would have really depended on the banks having these specific instruments," he said.
One-month U.S. T-bill rates jumped on Tuesday to their highest since the immediate aftermath of the collapse of Lehman Brothers in late 2008, and some of the largest players in the $2.66 trlilion money market fund industry are opting to hold dollars instead of U.S. government debt.
But these strains eased on Wednesday. Foreign exchange basis swap rates, which reflect the premium non-U.S. market participants pay to access dollar funds outside the U.S., edged lower. T-bill rates also came down from Tuesday's high.
Banks and investors around the world always have a need for dollar liquidity, but do not have direct access to the lending windows run by the Federal Reserve which guarantee U.S. banks easy access to cash.
As a result, they typically pay a premium to raise dollars via the foreign exchange forward markets. As worries over a potential liquidity crunch in the coming weeks have risen, so have those market rates.
"There's nervousness and a lot of tension ... but the fact there was no strong demand at today's auction and no demand at all over the last few months suggests euro zone banks can get funding in the market," sad another London-based money market strategist.
"There's no liquidity shortage," he said.
Both strategists added, however, that the situation may be rather more intense at the ECB's dollar auction next Wednesday - October 16 - if the US. debt-ceiling issue hasn't been resolved.
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