Central banks expand dollar operations (Reuters)

FRANKFURT (Reuters) – Major central banks around the world will cooperate to offer three-month U.S. dollar loans to commercial banks in order to prevent money markets from freezing up in the wake of Europe's sovereign debt crisis.

The European Central Bank said on Thursday it would hold three fixed-rate operations between October and December to provide banks as many dollars as they needed, in order to ease any funding crunch over the year-end.

"The European Central Bank has decided, in coordination with the (U.S.) Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank, to conduct three U.S. dollar liquidity-providing operations with a maturity of approximately three months covering the end of the year," the ECB said.

The announcement sharply boosted European bank shares and the euro. Shares in French bank BNP Paribas climbed as much as 22 percent from the previous day's close before ending 13 percent higher.

Some banks are finding it hard to obtain dollar funding for periods of longer than a few days as U.S. money market funds and other traditional dollar lenders become increasingly nervous about the threat of a Greek debt default, which could destabilize markets throughout the region. European bank stocks have lost a third of their value since July.

"This is a very welcome decision," Silvio Peruzzo, economist at RBS, said of the ECB's announcement.

"Market reaction is strong given the news in recent days that some big banks are struggling to get funding. This eases many funding concerns that there are regarding many European banks."

SIMULTANEOUS

The British and Swiss central banks said they would conduct three-month dollar lending operations simultaneously with the ECB on October 12, November 9 and December 7. The Bank of Japan, which already holds three-month dollar tenders, will add one on October 18.

The Fed, which in the past has faced criticism from lawmakers in Washington for its role in rescue efforts for European banks, will not itself offer three-month loans to banks in the United States. But it maintains dollar swap lines with the ECB and other central banks to ensure they can obtain additional supplies of dollars when needed.

The ECB already offers seven-day dollar loans every week. Two unidentified banks tapped this funding on Wednesday, borrowing a total of $575 million. It was the second time in a month that the facility was used; previously, it had not been tapped since February.

At the height of the global financial crisis in 2008-09, the ECB regularly held three-month dollar operations, before calmer conditions allowed it to phase them out. It held a one-off, three-month operation in May 2010 around the time of Greece's first international bailout.

(Editing by Andrew Torchia)

View the original article here

World stocks rally on Fed hopes, dollar down (Reuters)

NEW YORK (Reuters) – World stocks jumped and the dollar fell on Tuesday as dismal U.S. data spurred hopes the Federal Reserve may offer more economic stimulus.

Financial markets have been in turmoil over the past month on concerns the United States may be headed for another recession and as the euro zone's debt crisis has worsened.

World stocks, as measured by the MSCI All-Country World Index, and Wall Street's benchmark Standard & Poor's 500 index are on track for their worst month since 2008, after the collapse of Lehman Brothers.

The MSCI All-Country World Index jumped 1.7 percent, while the S&P 500 gained more than 2 percent. Data from China showing factory sentiment was not as weak as expected helped boost world shares overnight.

In the latest disappointing news on the U.S. economy, factory output in the U.S. central Atlantic region contracted again in August and new home sales fell to a five-month low in July.

Equity investors are taking a "bad news is good news" approach, though, betting that the data may spur more action from the Fed. Stocks staged a rally in the fourth quarter of last year, when the Fed announced a $600 billion bond-buying program.

"People are putting money on the Fed saying something and buying stocks ahead," said King Lip, chief investment officer at Baker Avenue Asset Management in San Francisco.

There is concern, however, that investors are overly optimistic, and many strategists have noted the U.S. economy has improved since a year ago.

Speculation is widespread in financial markets that Fed Chairman Ben Bernanke will use his Friday speech at a central banker conference in Jackson Hole, Wyoming, to signal a new monetary offensive to support a faltering U.S. economy.

Bernanke, however, is most likely to outline gradualist measures, which would disappoint those looking for a big bang approach such as a fresh round of bond buying, known as QE3.

"The market is really geared up for the idea of additional asset purchases to at least be put on the table when Bernanke speaks," said Brian Dolan, chief strategist at Forex.com in Bedminster, New Jersey. "I'm not sure it will play out that way, but that's what the market is betting on now."

The Fed chairman looks set to discuss ways the central bank could tweak the Fed's balance sheet as a means to put further pressure on medium and long-term interest rates and anchor them at low levels. These could be implemented in September and October at coming Fed meetings.

On Wall Street, the Dow Jones industrial average was up 198.71 points, or 1.83 percent, at 11,053.36. The Standard & Poor's 500 Index was up 23.00 points, or 2.05 percent, at 1,146.82. The Nasdaq Composite Index was up 62.63 points, or 2.67 percent, at 2,408.01.

Gold prices fell 2 percent, sharply retreating from a record of more than $1,900 an ounce in Asia trading, as a broad recovery in equity markets and riskier assets took the steam out of a bullion surge that many saw as overdone.

Spot gold was down 2.4 percent at $1,851.29 an ounce

Stimulus measures like those previously undertaken by the Fed increase the amount of dollars in the system, driving down the currency's value, which helps U.S. exports, and prompting investors to seek higher returns elsewhere.

The dollar edged down 0.3 percent against a basket of currencies.

Bonds, which normally move inversely to stocks, saw some light buying after the weak data on speculation the Fed will act to spur the economy, but the strength in equities appeared to be keeping a lid on their rally.

The benchmark U.S. 10-year note was up 2/32 in price, its yield edging down to 2.106 percent from 2.11 percent late on Monday.

In the oil market, prices bounced in choppy trading, supported early by the manufacturing data from China and Europe. Brent October crude rose 71 cents to $109.07 a barrel.

BANK BORROWING COSTS HIT

Ongoing fears of European banks' exposure to heavily indebted European nations like Greece and Italy are making it more expensive for banks to fund themselves in short-term funding markets.

U.S. bank debt costs are also being pressured in unsecured bond markets. The cost for interbank borrowing -- measured by three-month Libor, or the London interbank offered rate -- rose to 0.31178 percentage point on Tuesday.

European banks are facing higher dollar funding costs as U.S. money fund investors, nervous about exposures to peripheral euro zone countries, reduce the length and amount of loans to banks in the region.

The Thomson Reuters Peripheral Euro Zone Banks Index ended down 1.1 percent at 51.61 and is down 25 percent year-to-date.

(Reporting by Caroline Valetkevitch; Additional reporting by Ashley Lau, Steve Johnson, Frank Tang and Emily Flitter in New York and Jan Harvey in London; Editing by Leslie Adler)

View the original article here