* Dollar Libor extends near 3-week drop after Fed rate cut
* Fed discount window borrowings retreat but still high
* U.S. commercial paper market shows more vigor
* Fed swap lines ease Asian rates (Adds weekly Fed, ICI money fund data, new quote)
By Kirsten Donovan and Richard Leong
LONDON/NEW YORK, Oct 30 (Reuters) - Inter bank borrowing rates for U.S. dollars fell sharply on on Thursday, extending a near three-week slide, a day after the U.S. Federal Reserve cut its benchmark rates by half a percentage point and created more currency swap lines to ease dollar funding worldwide.
But U.S. banks continued to depend on the Federal Reserve, their lender of last resort, with borrowings at the Fed's discount window for overnight loans down from a week ago, but still at historically high levels.
Taiwan and Hong Kong followed the Fed with interest rate cuts on Thursday, while speculation persisted that the Bank of Japan would follow suit on Friday, and the European Central Bank hinted it may cut rates next week.
In response to the Fed's new target rate at 1.0 percent,
the overnight rate on unsecured dollars in the London interbank
market
Most euro and sterling Libor rates also fell on Thursday For more, see [ID:nLU169724].
Conditions in other parts of the credit market, however, remained mixed. U.S. commercial paper activity showed vast improvement, but U.S. mortgage rates rose sharply this week.
This suggests the worldwide efforts to unlock credit for cash-strapped borrowers have produced some successes but they could be thwarted by the looming global slowdown.
"You are definitely seeing signs of improvement particularly in money markets and interbank lending markets. It is not making its way to the mortgage and corporate bond market yet but you are going to have to take care of problems in money markets first," said Michael Feroli, U.S. economist with JPMorgan in New York.
Meanwhile, the premium or spread paid for borrowing three-month dollars over anticipated central bank rates, the Libor/OIS spread, narrowed by 13 basis points, indicating some easing of tension and traders said a rebound in equity markets was also adding to confidence on money markets.
VIM IN COMMERCIAL PAPER
The U.S. commercial paper market, which many companies rely on to fund their operations, has showed more swagger since the Fed launched its program to buy these short-term IOU's on Monday. It grew for the first time in seven weeks. The amount of outstanding CP rose by $100.5 billion to $1.550 billion in the week ended Oct. 29, Fed data show. See [ID:nN303144]
Demand for commercial paper nearly dried up last month after the bankruptcy of Lehman Brothers led to an upheaval in money market mutual funds, a major class of CP investors.
Not only have issuers sold more CP this week, but they have been able to raise longer-term funds, signaling greater investor confidence in CP as well as money market funds.
Companies sold 1,448 CP issues worth $62.55 billion that mature in 81 days and beyond on Wednesday, compared with 952 issues worth $41.63 billion on Tuesday, according to Fed data. See [ID:nN303285]
Money market fund assets increased by $1.35 bln in the week ended Wednesday to $3.538 trillion, the Investment Company Institute said on Thursday. For more, see [ID:nWBT010087]
Fed data showed its Commercial Paper Funding Facility held $144.8 billion in assets on Wednesday.
As for the Fed's discount window, average daily borrowing
which includes loans to banks, dealers, money market funds and
insurer AIG
FED OPENS NEW SWAP LINES
Interbank dollar costs also fell in Asia after the Fed announced four new currency swap lines with Brazil, Mexico, South Korea and Singapore worth $30 billion each to help ease the dollar funding shortages that have crippled money markets around the globe.
"The swap lines have done the trick," said Suresh Ramanathan, strategist with CIMB Investment Bank in Kuala Lumpur. But he expects most of the easing to take place in shorter maturities. The decision came a day after the Fed established a $15 billion swap line with the Reserve Bank of New Zealand, and brought its total swap lines with foreign central banks to 13.
The move coincided with the International Monetary Funds' decision to launch a short-term financing fund to help emerging market economies weather the global credit crisis.
For a wrap of the day's events see [ID:nLU504777]. (Additional reporting by Chris Reese and John Parry in New York)