December 15, 2017 / 3:25 PM / 3 months ago

FOREX-Dollar index firmer as volumes thin ahead of holidays

* Tax plan seen last major catalyst this year

* Cost to borrow short-term dollars surges (Updates with U.S. market open, adds data, quotes, changes dateline, previous LONDON)

By Karen Brettell

NEW YORK, Dec 15 (Reuters) - The U.S. dollar was slightly stronger on Friday as investors wound down trading activity after major central bank meetings this week and before the Christmas and New Year holidays.

The greenback weakened this week after the Federal Reserve on Wednesday left its rate outlook for the coming years unchanged even as policymakers projected a short-term jump in U.S. economic growth from the Trump administration’s proposed tax cuts.

The dollar gained against the euro on Thursday after the European Central Bank stuck with its pledge to provide stimulus for as long as needed, before losing ground again after two U.S. Republicans sought changes to the proposed legislation to overhaul the U.S. tax code. “Markets are really consolidating at this point into holiday trading,” said Mark McCormick, North American head of FX strategy at TD Securities in Toronto. “People will be eyeing up the U.S. tax plan. There are expectations building they could have it done by next week, if not that pushes if off until next year. That’s your last major risk event,” McCormick added.

The dollar index was last up 0.27 percent to 93.745.

The tax bill needs a simple majority to pass in the Senate, in which Republicans hold just 52 of the 100 seats, and no Democrats are expected to support it.

Democrat Doug Jones won the contest for a U.S. senate seat on Tuesday in Alabama, a Republican stronghold, trimming the Republicans’ already narrow Senate majority.

The cost for banks to borrow short-term dollar funds from other banks surged to its highest level since 2012 as financial institutions scrambled to secure funding before thinning trading volumes.

The cross currency basis swap “is moving in the U.S. direction as people seek funding to cover them through the end of the year,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York.

The three-month euro-dollar cross currency basis swap , which measures the premium banks have to pay to swap euros into dollars, traded at 107 basis points. It has widened from under minus 52 basis points at the beginning of the month.

The rising swap cost was not yet seen impacting the greenback, though it could be negative for the dollar, said Chandler.

“It’s very expensive for Europeans, say financial institutions, to buy Treasuries ... so it’s going to deter people from buying Treasuries and its going to encourage dollar-based investors to invest overseas,” Chandler said. (Editing by Susan Thomas)

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