MONEY MARKETS-Banks cash scramble accelerates on year-end
* One-month dollar Libor rate rises on year-end strain
* BOJ to hold emergency meeting on Tuesday
* Shortage of dollar and yen funds (Adds comments, updates with U.S. developments, adds NEW YORK dateline)
By Ian Chua and John Parry
LONDON/NEW YORK, Dec 1 (Reuters) - Banks' scramble for dollar funds in the global financial crisis is accelerating as year-end funding pressures force financial institutions to stockpile more cash.
In the bank-to-bank money market, one-month London interbank offered rates for dollar funds edged up to a near one-month high on Monday. European banks also continued to show their preference for hoarding cash rather than lending it out in the interbank market.
"Money market pressures are increasing and more pressure is likely ahead of the the year-end. There continues to be a shortage of dollars and yen" as banks scour for funding, wrote Marc Chandler, chief global currency strategist with Brown Brothers Harriman in New York in an e-mail note.
One-month dollar Libor USD1MFSR= was fixed at 1.91 percent on Monday -- the highest in nearly a month -- while the corresponding rate for sterling GBP1MFSR= also rose.
See [ID:nL1582287] for latest fixings for Libor, the London interbank offered rate; the leading global benchmark off which short term loans are set.
On Friday, a report from the European Central Bank said European Union banks must dramatically improve back-up plans for coping with unexpected liquidity shortfalls and that they must set aside the stigma of tapping central bank facilities in times of liquidity problems.
The rise in one-month Libor reflects the increasing demand for funds at the end of the year. Yet short-term lending rates are well below their October peaks and have been "fairly stable" for several weeks, said Michael Feroli, U.S. economist with JPMorgan in New York.
Governments' massive support for lending markets, including large foreign exchange swaps between central banks, a Federal Reserve facility to ease pressures in the commercial paper sector and U.S. guarantees on bank lending "have contributed to stability over the past month," Feroli added.
"There are a lot of measures in place that are aimed at stemming the year-end issue from getting too out of hand," one of which is the Fed's Term Auction Facility he said, referring to the conduit of cheap funding for the U.S. banking sector.
On Monday, the Fed set a minimum bid rate of 0.42 percent for an auction of $150 billion of 84-day loans.
Christoph Rieger, strategist at Dresdner Kleinwort in Frankfurt, said despite central bank actions, spreads have not contracted much and have in fact showed a tendency to widen.
"Conditions are difficult over year-end and they won't improve before that," he said. But he added that spreads should contract and Libor fixings are likely to fall in the New Year.
"Depending also on what the ECB and other central banks do, things should improve thereafter."
Official interest rates in Europe are expected to fall further this week, with both the ECB and Bank of England seen cutting borrowing costs by at least 50 basis points.
Federal funds in the U.S. overnight inter-bank market traded down to 0.50 percent, below the Fed's 1.0 percent target rate. Most bond market participants expect the U.S. central bank to cut its target rate by 50 basis points to 0.50 percent at its mid-December policy meeting.
Latest data revealed European banks deposited 203.889 billion euros at the European Central Bank vault overnight as of Nov. 30. While the figure was down from Friday, the amount was still nearly a quarter of the 790.486 billion euros the ECB has outstanding in open market operations.
Meanwhile, the Bank of Japan said it would hold an emergency policy meeting on Tuesday as Governor Masaaki Shirakawa warned that Japanese companies' funding conditions were worsening at a rapid pace that matched Japan's credit crunch a decade ago.
(Additional reporting by Vidya Ranganathan in SINGAPORE)
(Reporting by Ian Chua and John Parry; Editing by Dan Grebler)
