(Adds latest on federal funds rate)
NEW YORK, Oct 30 (Reuters) - A measure of strain in U.S. money markets grew to its widest in 2-1/2 months on Tuesday as a closely watched gauge of interbank borrowing costs increased to a decade high for a 10th straight session.
The London interbank offered rate for banks to borrow three-month dollars from each other climbed 1.4 basis points to 2.54100 percent, the highest since October 2008.
LIBOR is the rate benchmark for $200 trillion of dollar-denominated financial products, mainly interest rate swaps and floating-rate loans.
Meanwhile, the three-month overnight indexed swap (OIS) rate , which reflects traders’ expectations on the federal funds rate, held steady at 2.2750 percent.
The gap between three-month LIBOR and OIS expanded to 26.6 basis points from 25.2 basis points on Monday, its widest since Aug. 16.
This spread grows as it becomes more costly for banks to borrow from one another.
Money market rates have increased because of a combination of factors including more borrowing by the U.S. government, the Federal Reserve reducing its bond holdings and its campaign to raise short-term interest rates.
The federal funds rate averaged 2.20 percent on Monday for a fifth straight day, according to New York Federal Reserve data released on Tuesday.
The “effective” fed fund rate is the average cost of what banks charge each other to borrow excess reserves overnight.
The effective fed funds rate and the interest the Fed pays banks on excess reserves they leave with the U.S. central bank (IOER) remained at parity.
If the effective fed funds rate rises above IOER, some analysts say, the Fed would be seen losing its grip on controlling short-term borrowing costs.
They expect the Fed policymakers may increase IOER by a smaller increment if the officials were to raise the Fed’s overall interest rate target range at their Dec. 18-19 meeting.
Reporting by Richard Leong; Editing by Andrea Ricci and Steve Orlofsky