TOKYO/FRANKFURT (Reuters) - Overnight money market strains eased in Europe on the first day of the new financial quarter on Wednesday but longer dated rates hit new highs as lack of trust continues to paralyze bank-to-bank lending.
The mixed start to the fourth quarter came as U.S. lawmakers prepared to vote on a revised bailout plan for troubled banks, reviving hopes of stemming the global credit crisis.
Having ramped up liquidity supplies to help banks balance their end-of-quarter books, the Bank of England and the European Central Bank announced plans to drain excess overnight funds in local currencies.
But they joined the Swiss National Bank in offering more dollar liquidity as part of joint efforts with the U.S. Federal Reserve to ease shortages in dollar funding, although these have had limited success in persuading banks to lend to each other.
Money markets have frozen up since the bankruptcy of Lehman Brothers and nationalization of other major financial institutions in the United States and Europe has made banks very wary of lending to each other.
Benchmark interbank three-month rates -- which now cover the year-end period -- fixed higher in dollars, euros and sterling on Wednesday even as overnight rates fell sharply. Three-month dollar Libor edged up to 4.15 percent, the highest since January. The euro-zone equivalent for euros hit a near 14-year high of 5.29 percent.
"There's still a lack of trust," one euro-zone money market trader said. "Certain addresses can get no money at all, others can't get enough and others still are swimming in liquidity."
Some analysts have said central banks may consider cutting interest rates in a coordinated move to help give a boost to investors and limit the economic fallout from the crisis, but a solution to the money market breakdown remained elusive.
"It's not going to solve the core problem -- no one is lending to each other. I don't know how to fix that," said Gerrard Katz, head of North Asia currency trading at Standard Chartered in Hong Kong.
Overnight money market rates fell from Tuesday's peaks, with dollar rates settling at 3.79 percent, from close to 7 percent the day before -- the highest in at least 7-1/2 years.
Massive liquidity injections pushed traded rates close to zero at one point in U.S. trade later on Tuesday and the Fed Funds rate dropped to 1.5 percent, below the Fed's 2.0 percent target.
"Yesterday was month-end, it's down a lot from those real stress levels, but still not back to normal," a trader at one euro-zone bank said of overnight dollar conditions.
Traders in Asia quoted overnight dollar borrowings seesawing as high as 6 percent. Activity was limited due to holidays in Singapore and other financial centers.
The BoE logged muted demand at its dollar tenders on Wednesday, lending $7.5 billion in daily funds from an available $10 billion. It found takers for less than half the $30 billion weekly offer, lending out $13.4 billion.
But euro-zone and Swiss banks showed strong demand. The ECB could have lent out the $50 billion it had on offer almost 1-1/2 times over and charged rates of 3.25 percent and higher, while the SNB lent $10 billion at an average rate of 2.44 percent.
At the same time, the ECB said it would drain 200 billion euros ($282.5 billion) from overnight markets after banks swamped its overnight deposit facility with more than 100 billion euros, preferring to offload excess supplies at the central bank than lending it to rivals.
The BoE also drained overnight cash, mopping up 10 billion pounds.
In Asia, the Bank of Japan and the Reserve Bank of Australia kept the money flowing, injecting extra funds into their markets as banks still had trouble securing cash.
The BoJ injected 1.6 trillion yen ($15 billion) of one-week funds, responding to big demand from foreign banks. But it also drained 400 billion yen overnight as Japanese banks remained awash in funds, causing the overnight call rate to fall slightly below the 0.5 percent target.
Since the demise of Lehman Brothers last month, Japanese banks have turned cautious about lending funds to foreign institutions.
India felt the spread of the global credit crisis as its rupee overnight cash rates jumped above 17 percent on Wednesday, the highest level since April 2007.
The central bank has intervened regularly to sell dollars to try to support the rupee, which has slumped 16 percent against the dollar this year, partly as foreign investors sell off emerging market assets. That has squeezed cash in the domestic money market.
Hong Kong announced measures as tight conditions in the U.S. dollar market sparked a jump in its short-term rates. The Hong Kong Monetary Authority lengthened the duration of its operations and accepted a wider array of collateral in return for cash.
(Additional reporting by Kirsten Donovan and Fiona Shaikh in London, Andrea Lentz and Marc Jones in Frankfurt, Chikako Mogi in Tokyo and Kevin Yao in Singapore)