Overnight money rates ease, term rates spiral higher

By Eric Burroughs and Krista Hughes

TOKYO/FRANKFURT (Reuters) - Overnight money market strains eased in Europe on the first day of the new financial quarter on Wednesday but longer dated rates hit new highs as lack of trust continues to paralyse bank-to-bank lending.

The mixed start to the fourth quarter came as U.S. lawmakers prepared to vote on a revised bailout plan for troubled banks, reviving hopes of stemming the global credit crisis.

Having ramped up liquidity supplies to help banks balance their end-of-quarter books, the Bank of England and the European Central Bank announced plans to drain excess overnight funds in local currencies.

But they joined the Swiss National Bank in offering more dollar liquidity as part of joint efforts with the U.S. Federal Reserve to ease shortages in dollar funding, although these have had limited success in persuading banks to lend to each other.

Money markets have frozen up since the bankruptcy of Lehman Brothers and nationalisation of other major financial institutions in the United States and Europe has made banks very wary of lending to each other.

Benchmark interbank three-month rates -- which now cover the year-end period -- fixed higher in dollars, euros and sterling on Wednesday even as overnight rates fell sharply. Three-month dollar Libor edged up to 4.15 percent, the highest since January. The euro-zone equivalent for euros hit a near 14-year high of 5.29 percent.

"There's still a lack of trust," one euro-zone money market trader said. "Certain addresses can get no money at all, others can't get enough and others still are swimming in liquidity."

Some analysts have said central banks may consider cutting interest rates in a coordinated move to help give a boost to investors and limit the economic fallout from the crisis, but a solution to the money market breakdown remained elusive.