* 3-month yen Libor dips below dollar first time since Aug
* ECB's pledges to return to variable 3-mo ops
* But ECB extends unlimited 1-week, 1-month facilities * Portuguese repo spread widen, Greek repo thinly traded
By George Matlock
LONDON, March 4 (Reuters) - The interbank cost of borrowing three-month dollar funds edged higher on Thursday while for yen funds it fell, taking the Japanese currency rate below that of the greenback for the first time since August.
In Europe, European Central Bank President Jean-Claude Trichet outlined the first steps to stemming ample liquidity provisions the bank has made since late 2008.
The ECB will return to ordinary, variable rate, fixed sum tenders for 3-month loans for banks from April, unwinding some of the extraordinary help it gave the euro zone economy.
But balancing that move, Trichet also told a news conference, after the ECB left key interest rate steady at a record low 1.0 percent, that the bank would lend banks unlimited amounts in its weekly and monthly operations until at least October, longer than many analysts expected. [ID:nLDE62307B]
The decision to return to an auction-based approach for its longer-term lending tenders might encourage banks back to the ECB's weekly operations.
The change should make it easier for the ECB to reduce the amount of excess liquidity in the banking system when they feel it is necessary, according to Lena Komileva, director of G7 Market Economics, Tullett Prebon, London.
But some traders remained sceptical.
"Trichet's announcement about returning to auction for 3 month refi is a surprise and it is premature," said one Italy-based money market trader. While variable rate three-month tenders may have less impact on cash money market rates than some feared, Komileva said, "It is clear the level of central bank-supported liquidity in the system will decline, which will lift Eonia and forward rates, contributing to higher Euribor rates."
Analysts saw little impact on Libor rates from the policy change.
LIBOR YEN DUCKS DOLLAR
Yen Libor has historically been below dollar Libor and the crossover may suggest a normalisation in money markets.
That changed in August, making the dollar a more attractive funding currency for carry trades and hampered efforts to keep the yen competitive for export markets.
In December, the Bank of Japan introduced three-month funds at a 0.1 percent rate at an emergency policy meeting, aimed at depress rates, in the face of government pressure to do more to fight deflation and following the yen's surge to a 14-year high against the dollar in late November. [ID:nT0E5B904U]
On Thursday, just ahead of the ECB's rate decision, the yen Libor JPY3MFSR= was fixed at 0.25063 percent -- its lowest level since May 2006 -- and the dollar USD3MFSR= rate at 0.25219 percent, according to the latest fixings by the British Bankers' Association. [ID:nEAP000023].
That left three-month Swiss franc Libor CHF3MFSR= at 0.24833 percent the cheapest among major currencies.
"Evidently, the yen is trending lower while the dollar rate just hovers around 25 basis points waiting for the day the Federal Reserve will tighten," said Peter Chatwell, a market analyst at Credit Agricole CIB in London.
While Greece sold 5 billion euros of a new 10-year syndicated bond, the Greek repo market remained stressed, and so too did the Portuguese repo market.
"Against this backdrop...Portuguese repo spreads over Eonia have widened with 1-month repos trading some 10 basis points above German repos, double the levels seen a month ago and liquidity is thinning," Komileva said.