Global credit fix hits bump as Fed borrowing eases

By Kirsten Donovan and Richard Leong

LONDON/NEW YORK (Reuters) - Efforts to unlock global money markets hit a snag on Thursday as banks raised their lending rates on dollar funds for the first time in two weeks.

At the same time, the latest Federal Reserve data showed financial companies relied less on the Fed for overnight cash in the past week. It was the first time since the demise of Lehman Brothers last month that borrowing from the Fed's discount window declined.

Dollar overnight rates inched higher on Thursday to 1.206 percent, the first rise in almost two weeks.

In the last two weeks, bank-to-bank lending costs have fallen sharply after huge cash injections, bank bailouts and interest rate cuts by central banks and governments worldwide. For example, 3-month dollar rates are down nearly 1-1/4 percentage points.

Analysts fear the relief could be negated by a sharp global slowdown, which could tighten bank lending to companies.

Outside of bank lending, the U.S. commercial paper market -- despite evidence of improved demand for this type of corporate debt -- contracted for a sixth straight week to its smallest in 3-1/2 years. Many U.S. companies rely on commercial paper to fund their day-to-day operations

"Things have stabilized a bit, but it's still spotty," said Jeff Given, portfolio manager at MFC Global Investment Management in Boston.

Bank of Canada Governor Mark Carney said on Thursday he expects the United States will dip into a recession while other major economies continue to slow.