Dollar funding tight in Asia, credit worries persist

SINGAPORE, Oct 13 (Reuters) - The cost of dollar deposits stayed high in Asia on Monday as the nervousness in interbank lending persisted even after heavy cash injections by major central banks and last week's joint round of rate cuts.

U.S. dollar deposit markets were illiquid and volumes low in Asia on Monday on account of a U.S. holiday. Traders said the few transactions taking place were for tom-next funds, where banks borrow for a day from Tuesday to Wednesday.

"Most people are on the sidelines. Tom-next range is between 4 and 6 percent but most trades are between 4-4.5," said a trader in Singapore.

A trader in Jakarta said tom-next dollar funds were easier, at around 3.5 percent.

Overnight dollar cost between 4 and 7 percent in Asia on Friday, far above the Federal Reserve's 1.5 percent target. In London, interbank dollar overnight rates were indicated at 4 percent but later fixed at near 2.47 percent on Friday.

U.S. federal funds traded at 1 percent in New York on Friday.

Central banks will have to guarantee interbank lending if the volatility in dollar funding is to end, some traders said.

The cost of dollar overnight funding had risen as far as 10 percent during this financial crisis, after the collapse of Lehman Brothers (LEHMQ.PK) sparked a fresh bout of extreme risk aversion and volatility. (Reporting by Vidya Ranganathan; Editing by Valerie Lee) ((vidya.ranganathan@thomsonreuters.com; +65-68703090; Reuters Messaging: vidya.ranganathan.reuters.com@reuters.net))