Dollar Lending Continues To Decline

The dollar’s lending rate is not fairing well and it declined to its lowest number in more than 4-1/2 years in Asia on Monday, even though it continued to trade with a wide enough margin over the official lending rates to suggest that maybe cash was not being circulated as freely as it should’ve been during stable financial times. Additionally, the swap spreads on the dollar continued to tighten bringing them to their narrowest since the middle of 2007. Analysts say that tightening was due to the grim job data that showed unemployment at a close to 16 year high on Friday. This data has investors and traders expecting the Federal Reserve to keep their rates near the zero margin for a long time.

The interbank American dollar rates in Singapore hit their lowest number since April of 2004 and the 3-month SIBOR was still around 108 basis points higher than the usual effective overnight federal funds rate. Amy Auster, the head of international economics research at ANZ, said about the rates, “Conditions are normalising somewhat though LIBOR is still at a hefty premium to the fed funds rate.” Auster feels that the rates probably would not return to normal until closer to the end of 2009 and that narrow and broad money indicators are pointing towards cash that is being hoarded by banks on a global scale instead of being circulated through the economy. The rates on the 3-month dollar funds in Singapore fell to 1.195% from 1.29714% on Friday, January 9. The 3-month LIBOR was traded at a spread of 1.08% points over the overnight indexed swap.

With the dollar swap spreads tightening, the two year dollar swap spread is currently at 54.75 basis points, the tightest it has been since August of 2007. This was when the effects of the subprime mortgage collapse were just starting to be felt. This spread is over 100 basis points from its widest in October 2008.

The central bank in Australia is still waiting to receive bids on a $10 billion repurchase tender as of Monday, 12 January 2009. Analysts feel that this suggests the demand for the American currency’s liquidity is ebbing from the high and intense levels of 2008. Katie Dean, a strategist at ANZ, feels that banks simply may not be interested in borrowing the 28-day dollar from Australia’s Reserve Bank at the 0.65% rate it is offering. Interbank rates are considerably lower with the 1-month LIBOR weighing in at 0.3% on Friday, January 9. “Because LIBOR rates have come in quite a bit, it now means it effectively is cheaper for banks to access the money market than to access the RBA. There is clearly better functioning of U.S. dollars through the markets,” Dean said.

Investors are starting to bet on an even steeper fall in interbank rates with the LIBOR rates declining regardless of the optimism being felt over the new stimulus measures the incoming Congress is getting set to announce in the United States after President-elect Barack Obama’s inauguration at the end of January.