MONEY MARKETS-Record low US dollar borrowing costs before Fed

* 3-month dollar, sterling Libor at record low before Fed

* Analysts expect Fed to keep mum on exit strategies

* Euro policy rates could rise earlier next year

(Recasts, adds analyst comments, U.S. time zone
developments, adds byline, NEW YORK dateline)

By John Parry and George Matlock

NEW YORK/LONDON, Aug 12 (Reuters) - The cost for banks to
borrow from each other over three months hit fresh record lows
in U.S. dollars and British pounds on Wednesday as the crisis
in short-term lending markets continued to ease ahead of the
U.S. Federal Reserve's policy decision and statement.

Since late 2008, central banks' massive cash injections
into the global financial system have had a dramatic impact in
bringing down short-term borrowing costs and unblocking frozen
credit markets.

Three month dollar Libor rates USD3MFSR= were fixed at
0.44969 percent on Wednesday by the British Bankers'
Association, down from 0.45438 percent on Tuesday.

Record low fixings for the interbank cost of borrowing
dollar and sterling funds remain the trend even as the global
economic outlook improves and investors start to bet on
monetary tightening on the horizon.

And even as analysts speculate the Fed may hint that it
will be slowly trimming back its purchases of securities and
emergency liquidity programs, short-term borrowing rates
continue declining.

Fixed-income analysts expect that for now, the Fed will
not spell out how it will ultimately end its various liquidity
programs and will be very cautious in acknowledging even a
gradual winding down of these quantitiative easing measures in
its policy statement.

"We should not expect an update on exit strategies," wrote
George Goncalves, chief fixed income rates strategist with
Cantor Fitzgerald in New York in a research note on Wednesday.
"Its too early for that," he wrote.

The Fed is expected to leave its near zero key interest
rate steady at the conclusion of the meeting at around 2:15
p.m. ET.

Yet over the next year, global central banks may start
raising rates, market participants expect.

More optimism from European Central Bank President
Jean-Claude Trichet and improved economic data both sides of
the Atlantic have sent forecasts for a ECB refi rate hike of a
25-basis-points to 1.25 percent to June 2010 compared with late
next year expected only a few months ago. [ID:nL4443131].

Similarly, a more upbeat economic assessment by Bank of
England governor Mervyn King on Wednesday added to the optimism
among central banks. [ID:nBOE001998]

Across the Atlantic, three-month borrowing rates for
U.S.-based banks edged slightly down according to ICAP's New
York Funding Rate, to 0.4462 percent USNYFR3M= from the
previous session's 0.4478 percent, ICAP said.

Overnight bank deposits at the ECB fell sharply, a day
after the central bank drained overnight funds from money
markets.

Later, the ECB was active in money market operations,
allotting around 13 billion euros in three-month money, and
11.8 billion euros in six-month money.[ID:nECB000053]
[ID:nECB000054]

The ECB also allocated around $45 billion in seven-day
dollar tender. [ID:nFAE005233]

(Reporting by John Parry and George Matlock)