* Dollar costs down, spreads stay near tightest this year
* Joint withdrawal of dollar liquidity has no impact
* New Zealand swaps now expect 150 bps of rate rises in 2010
By Vidya Ranganathan
SINGAPORE, Sept 25 (Reuters) - Dollar funding markets in Asia barely reacted on Friday to a joint withdrawal by the Federal Reserve and a few European central banks of short-term dollar loans to banks, even though equity markets were weighed down by the news.
Other factors such as weakness in U.S. housing data and comments from a Fed official suggesting the need for rate rises also appeared to have weighed on regional stock markets, which fell in step with the decline on Wall Street.
But dollar funding costs in Singapore were unchanged and near record lows at 0.29714 percent for 3-month cash, lending banks unperturbed by Thursday's announcement from the Fed that it would begin to scale back short-term cash auctions in early 2010.
The European Central Bank, the Swiss National Bank and the Bank of England announced they would likewise cut back on dollar loans to their banks.
From the initial sell-off in stock markets and risky assets, it appeared some market players saw these moves as the first steps by central banks to exit from their extraordinarily loose monetary settings created at the height of the credit crisis.
"It was not an exit. It was just a tidying up, an administrative thing to remove facilities which were not being used anymore," said Imre Speizer, a senior markets strategist at Westpac Bank.
"In any case, the liquidity that they had provided to the market through these facilities was only for the financial markets, it was never for the wider monetary system," Speizer said, adding that most of that money had stayed within the banking system and wasn't being lent out.
Several central banks including, in Asia, the Bank of Korea had put in place dollar credit lines from the Fed which they tapped last year and in the early part of 2009 to supply scarce dollars to their banking systems. The Bank of Korea has already phased out some of its loans and swaps to its banks.
The Fed on Thursday said it would trim the size and maturity length of auctions, while continuing Term Auction Facility (TAF) short-term cash auctions at least through January. It said it would cut the size of 84-day auctions to $50 billion in October and $25 billion in November and December, while reducing the maturities of those auctions.
The European Central Bank said it would scale back its provision of U.S. dollar liquidity to just one-week funds and would stop 84-day operations after the operation on Oct. 6.
The Bank of England announced plans to suspend its three-month dollar repurchase operations after the last one on Oct. 6 but would continue to offer 7-day funds until January. The Swiss National Bank said it would stop 84-day dollar liquidity operations.
The Fed's balance sheet showed central banks still have liquidity swaps totalling about $59 billion as of Thursday.
Just a day earlier, the Fed said it would slow its purchases of mortgage securities and agency debt in order to extend that $1.45 trillion programme to the end of March 2010.
Spreads between two-year dollar interest rate swaps and
comparable Treasuries
The spread between 3-month dollar LIBOR and overnight
indexed swaps
Even the March 2010 Eurodollar futures contract showed little reaction to the Fed's ending of its auctions, with implied 3-month yields at 0.69 percent, unchanged from Thursday.
KIWI SWAPS
In New Zealand meanwhile, markets continued to raise their expectations of rate rises in 2010, encouraged by last week's improvements in data, including the unexpected end to the long economic recession.
The ensuing steady rise in overnight indexed swaps
The curve showed market expectations for at least 3 rate rises of 25 bps each by June, and a rise of 150 bps in the 2.5 percent overnight policy rate (OCR) within the next 12 months.
"If the data keeps coming in better as it did last week then the pressure will be on them to maybe bring forward the first hike by a month or two," said Westpac's Speizer. "The market may be slightly pre-emptive but not a great deal too pre-emptive."
Sue Trinh, a strategist at RBC Capital Markets said the market now had priced in a more realistic pace of policy tightening.
"The RBNZ's threat to keep the OCR at or below the current level through until the latter part of 2010 is simply not credible, and the Bank will need to normalise rates sooner than the market had discounted," Trinh said in a note.
(Editing by Jeremy Laurence)