Holy Libor, Batman!

TO BE NOTED: From Bloomberg:

"Libor Drops by Most in More Than Two Months as Recession Eases

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By Lukanyo Mnyanda

May 21 (Bloomberg) -- The cost of borrowing in dollars between banks dropped the most in more than two months, adding to evidence that policy makers are unfreezing credit markets.

The London interbank offered rate, or Libor, for three- month dollar loans decreased six basis points today, the biggest drop since March 19, to 0.66 percent, the British Bankers’ Association said. The rate has more than halved this year. Libor is used to set borrowing costs on about $360 trillion of financial products globally, according to the BBA.

The decline coincides with growing signs the worst of the financial turmoil has passed. Europe’s manufacturing and service industries shrank at the slowest pace in eight months in May, a report showed today. Nobel Prize-winning economist Paul Krugman said in Ho Chi Minh City, Vietnam, that the global “freefall” may have ended, with the U.S. economy on course to expand “slightly” in the second half.

“The decline in Libor does gel with a lot things going on, as general volatility and risk aversion have been reduced,” said Padhraic Garvey, head of investment-grade debt strategy at ING Groep NV in Amsterdam. “The market has a nose for things getting better in due course.”

The Federal Reserve committed $12.8 trillion to stem the longest recession since the 1930s and central banks around the world cut interest rates to near zero as they sought to ease the flow of credit. Three-month Libor, one of the rates that determines everything from student loans to mortgages, rose to 4.82 percent in October in the wake Lehman Brothers Holdings Inc.’s collapsed a month earlier.

TED, OIS Spreads

The TED spread, the difference between what banks and the U.S. Treasury pay to borrow for three months, narrowed four basis points to 51 basis points today, the least since August 2007, when the credit crisis began. It peaked at 464 basis points on Oct. 10.

The Libor-OIS spread, another gauge of banks’ reluctance to lend that measures the difference in the three-month rate and the overnight indexed swap rate, decreased to 46 basis points, the least since February 2008. It has dropped from as high as 364 basis points in October.

Libor is derived from a survey of banks conducted by the BBA each day in London. Institutions are asked how much it would cost them to borrow from each other for 15 different periods, from overnight to one year, in currencies from dollars to euros and yen. The BBA then calculates averages that exclude the four highest and lowest quotes, before publishing them before noon.

To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net"

"The dollar doesn’t have to go south if all the economies reflate at the same time.”

I like William Gross, so here's a chance to quote him from Bloomberg:

"By Ye Xie

Dec. 11 (Bloomberg) -- The dollar fell to a six-week low against the euro and yen as the cost of borrowing in the U.S. currency tumbled, signaling less demand for year-end funding.

The greenback also dropped after a report showed the U.S. trade deficit unexpectedly widened in October. The Swiss franc dropped against the euro and yen after the central bank reduced its main interest rate to a four-year low of 0.5 percent.

“Dollar liquidity and funding concerns are starting to fade,” said Shaun Osborne, chief currency strategist in Toronto at TD Securities Inc., a unit of Canada’s second largest bank. “These factors have been important sources of support for the dollar in the past few months.”

The U.S. currency fell 1.7 percent to $1.3243 per euro at 8:40 a.m. in New York, from $1.3023 yesterday. It dropped 1.6 percent to 91.28 yen from 92.76. The euro traded at 120.77 yen, compared with 120.78 yen.

The cost of borrowing in dollars for three months in London fell to the lowest level in more than four years. The London interbank offered rate, or Libor, that banks say they charge each other for such loans slid 0.1 percentage point to 2 percent, the lowest level since September 2004, British Bankers’ Association data showed. That’s still one percentage point above the Fed target, up from an average of 16 basis points in the seven years to August 2007, when the credit freeze began.

“From a fundamental basis, there’s a case for avoiding the dollar,” said Adrian Schmidt, a London-based senior foreign- exchange strategist at the Royal Bank of Scotland Plc, the fourth-biggest currency trader. “For the moment the dollar’s on the back foot.”

How interesting.

"The ICE’s Dollar Index, which tracks the greenback against the euro, the yen, the pound, the Canadian dollar, the Swiss franc and Sweden’s krona, fell 1.2 percent at 84.449, below the 55-moving-day average of 84.5, as traders took advantage of the low liquidity to test how far it may fall, Hardman said. They will drive the dollar to $1.345 per euro this year, he said.

The dollar has gained 11 percent against the euro in 2008 as the credit-market seizure and $980 billion of losses on mortgage-related securities worldwide led investors to repatriate overseas investments to the U.S. and seek funding in the greenback.

The yen gained versus all 178 currencies tracked by Bloomberg this year as the global recession encouraged Japanese investors to bring funds back home and global equities plunged.

Japan’s currency jumped 21 percent versus the dollar, 34 percent against the euro and 66 percent against Brazil’s real as the financial crisis prompted investors to reverse carry trades, in which they purchase higher-yielding assets funded in countries where borrowing costs are lower. Japan’s benchmark rate of 0.3 percent is the lowest among major economies.

The U.S. trade deficit expanded 1.1 percent to $57.2 billion in October from a revised $56.6 billion in September, the Commerce Department said today in Washington. The gap was projected to narrow to $53.5 billion from an initially reported $56.5 billion in September, according to the median forecast in a Bloomberg News survey of 70 economists.

The U.S. budget deficit in November swelled to $164.4 billion, from $98.2 billion in the year-earlier period, as the government used taxpayer money to shore up the financial system by buying stakes in banks, the Treasury Department reported yesterday. Government revenue fell 4.2 percent, while spending soared 24 percent."

Let's see what Gross says:

"The dollar may extend its decline as the U.S. government increases its budget deficit by spending “trillions of dollars” to revive the economy, said Bill Gross, manager of the world’s biggest bond fund at Pacific Investment Management Co. in Newport Beach, California.

“There’s some risk” for the dollar to weaken, Gross said in an interview on Bloomberg Television yesterday. “It is fair to say other economies are doing much the same thing. The dollar doesn’t have to go south if all the economies reflate at the same time.”

Let's hope for "reflation" ( Another term. Yikes. ) , I suppose.