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The world's central banks jumped to grease money market wheels again on Friday, pouring in more money even as stocks and the dollar rallied in response to an emergency U.S. plan to mop up toxic debt.
Japan, Australia, India and Indonesia pumped over $42 billion into their money markets as cash remained hard to find despite Thursday's unprecedented move, coordinated by the U.S. Federal Reserve, to make an extra $180 billion in dollar funds available to the banking system.
In Europe, banks showed increased appetite for short-term dollars from the Bank of England and the Swiss National Bank, although the European Central Bank logged slightly lower demand and the longer-term lending environment remained generally tense.
The three institutions lent out a total of $70 billion over the weekend, a slight increase on the $64 billion allocated on the first day of the joint liquidity action on Thursday.
The BoE used half of its $40 billion allotment, and the SNB received bids worth double the $10 billion it had on offer. Demand at the ECB's $40 billion auction was again strongest, but lower than Thursday's bidding at $96.7 billion.
Well-oiled money markets, where banks lend short-term funds to each other to smooth out daily swings in their balances, are crucial for the proper functioning of the financial system and the economy at large.
Overnight euro rates were trading close to the ECB's 4.25 percent benchmark on Friday despite banks having to repay 25 billion euros in one-day funds before the weekend.
London bank-to-bank rates also eased for overnight dollar funds, dipping to 3.25000 percent from a seven-year high above 6 percent hit on Tuesday, although this remains above the Fed's 2 percent target.
Lending for any longer than a few days remains fraught. Libor rates for three-month euros, sterling and dollars all rose and Euribor euro rates for one-week, three-month and six-month rates jumped to historic highs.
Analysts said the success of a U.S. Treasury plan to create a fund that would mop up bad debt, similar to one that helped resolve the savings and loan crisis of the late 1980s, was key.
"At present, confidence is the most important factor and this will only be maintained if the rescue plans are delivered on both sides of the Atlantic," said Andrew Turnbull, senior sales manager at ODL Securities.
In the wake of the plan, U.S. shares shot up and European shares also rallied sharply, with the FTSEurofirst 300 index of top European shares up 6 percent at 1,127.51 points with banks the biggest gainers. The dollar held on to hefty gains against the yen, pound and euro as markets waited for further details.
Britain imposed a temporary ban on short selling of financial stocks on Thursday and the Securities and Exchange Commission did likewise early on Friday, offering investors a glimmer of hope for resolution to the 13-month old credit crisis that sank Lehman Brothers,.
Short selling allows investors to profit from falling prices and has helped bring Wall Street icons to their knees.
ASIA STILL TIGHT
During the Asian day funding remained tight, with banks lending dollars to each other at between 3 and 6 percent, still off a peak of 10 percent hit on Tuesday.
The Bank of Japan pumped 3 trillion yen ($28.72 billion) into the money market for the fourth day in a row as foreign borrowers struggled to get cash and were charged much more than the BoJ's 0.5 percent policy target for overnight funds.
Bank Governor Masaaki Shirakawa told lawmakers the central bank was keeping all of its options open, when asked about the chance of cutting its interest rate.
While the world's top central banks dished out billions of dollars to grease money markets, both the Bank of Japan and the Fed kept their benchmark rates on hold this week and the European Central Bank is expected to keep its rates steady too.
