Dollar Rises Against Euro on Demand for U.S. Currency Funding

By Ye Xie

Oct. 1 (Bloomberg) -- The dollar rose against the euro for a third day as demand for funding in the U.S. currency increased, reflecting banks' reluctance to lend to each other amid a global credit crunch.

``Markets need dollars,'' said Matthew Kassel, director of proprietary trading at ING Financial Markets LLC in New York. ``They need funding, and they buy dollars in the spot market.''

The dollar advanced 0.4 percent to $1.4035 per euro at 8:32 a.m. in New York, from $1.4092 yesterday. The dollar traded at 106.28 yen, compared with 106.11. The euro dropped 0.3 percent to 149.11 yen, from 149.56.

Foreign banks are paying near the highest premiums in at least a decade to borrow in dollars in the swaps market even after the Fed this week increased the amount of funds available to other central banks to $620 billion from $330 billion. The price on one-year cross-currency basis swaps between yen and dollars reached minus 70 basis points, the biggest effective premium for dollar funding since Bloomberg began tracking the data in 1997.

The London interbank offered rate, or Libor, that banks charge each other for overnight loans slid 308 basis points today to 3.79 percent, the British Bankers' Association said. It surged to 6.88 percent yesterday. The one-month euro rate climbed to an all-time high of 5.07 percent, and three-month dollar loans rose to the highest level since January. The Libor- OIS spread, a gauge of cash scarcity, held near a record.

To contact the report on this story: Ye Xie in New York at yxie6@bloomberg.net