MONEY MARKETS-Dollar fund rates ease in Asia, more falls seen

By Umesh Desai

HONG KONG, Oct 31 (Reuters) - The cost of borrowing dollars in Asia fell for the third straight day on Friday, as moves by central banks across the world to improve the availability of dollars infused confidence in financial markets.

The Bank of Japan was the latest central bank to cut interest rates following similar moves by the U.S. Federal Reserve and central banks in China, Hong Kong and Taiwan.

The BOJ cut its overnight call rate target to 0.30 percent from 0.50 percent, its first reduction in seven years. [ID:nTKU003142]

Meanwhile, policymakers at the European Central Bank said it could cut interest rates next week as eurozone economic growth could be close to zero next year.

"We see clear commitments from central banks around the globe, that they are prepared to provide sufficient liquidity to get markets functioning again," said Patrick Bennett, Asia foreign exchange and rates strategist at Societe Generale.

Interbank overnight dollar deposits were quoted around 0.4 percent in Hong Kong, around 0.3 percent in Kuala Lumpur and 0.40-0.90 percent in Singapore.

On Thursday, rates for overnight dollar funds were quoted at 0.75-1.0 percent in Hong Kong, 0.7 percent in Kuala Lumpur and 0.75-1.25 percent in Singapore.

In response to the Fed's new target rate of 1.0 percent, the overnight rate on unsecured dollars in the London interbank market USDONFSR= was set at 0.73125 percent, its lowest since at least 2001.

STILL NOT NORMAL

And although the premium or spread paid for borrowing three-month dollars over anticipated central bank rates, the Libor/OIS spread has been narrowing, analysts say the differential needs to reduce further.

"Levels are still not normal yet, if you look at the LIBOR versus OIS or LIBOR versus the policy rate, there is still a big spread. There is more work for the Fed to be done," said Edward Lee Wee Kok, Asia head of fixed income strategy at Standard Chartered Bank.

Although liquidity conditions are slush in the overnight lending market, the situation is not the same in the term money market where some banks are somewhat hesitant to lend.

Three-month dollar deposits were quoted at around 3.1 percent in Hong Kong, around 3.0 percent in Kuala Lumpur and 3.0-3.75 percent in Singapore, traders said.

On Thursday, rates for three-month dollar funds were quoted at 2.75-3.25 percent in Hong Kong, 4 percent in Kuala Lumpur and 3.25-3.75 percent in Singapore, traders said.

"There are concerns about the longer term sustainability of various institutions and their capital adequacy ratios," said V. Anantha Nageswaran, head of investment research, Asia-Pacific with Bank Julius Baer.