Libor and Euribor: The Dollar Impact

Further pushes lower from the London Interbank Offered Rate have signaled that the flow of borrowing and lending between banks may be starting to happen at far less of a premium than has been seen over the last six weeks since the collapse of Lehman Bros in the U.S.

The impact of losing a cornerstone of the inter-bank market was not lost on institutions, who suddenly had no desire to lend and an inability to borrow to and from other institutions. The European markets have been bolstered by the injection of dollars that have been made available by the Federal Reserve, that has not only increased the value of the USD, but added to regional central banks' liquidity pool, has created a little calmness (relatively speaking) that has not been seen in a little while.

The end of the credit crisis road, and the implications for the rebuilding of trust, as well as the rebuilding of market mechanics, will take time and will definitely have to be judged one slow day at a time. The stabilization of the European markets in the near-term, after Euribor rates reduce a little will likely allow the regional currencies some breathing room against the dollar.

“There is no doubting the fact that the amount of dollar based credit lines are now at extreme levels, and although there is always the possibility that they will get tapped in to, it does look as though the long-dollar wishing well may have been over-used” said Anthony Tillman, trade desk director at TheLFB-Forex.com. “Attention now goes to the Hong Kong rate” he said, “and the fact that the International Monetary Fund will now have to turn attention to emerging markets and Asian economies who are hunting down liquidity. As one fire looks to goes out temporarlily in Europe another one sparks up in Asia”.

The fact that the dollar was made available at discount rates to massive degrees has pushed the value of the greenback higher, but now it seems that dollar valuations may be tested. Any USD test will be seen in the ability of equity markets to hold in the green for a few sessions, and confirm that risk tolerance, and the ability to borrow to invest, may at last be here. A trickle of available credit, initiated by the dollar liquidity, may turn into a flow of money looking to get short on the greenback if in fact the market shows a continued reduction in Libor and Euribor rates. The USD has overshot its mark, now consolidation and maybe even selling of the buck, may be the consequence of these rate reductions if they start to show themselves in Libor and Euribor rates.