By Jamie McGeever
LONDON, Dec 19 (Reuters) - Central banks around the world announced their latest effort to pump cash into the financial system on Friday but noted overall demand for U.S. dollars has declined, in a sign the global credit crunch may be easing.
Led by the Federal Reserve, they said they will continue to provide U.S. dollar liquidity in the first quarter of next year, although demand for dollar funding in Europe is showing signs of falling.
The Fed will hold three auctions of 28-day loans through its Term Auction Facility and three auctions of 84-day loans, while the European Central Bank and Swiss National Bank said they will offer as much 7- 28- and 84-day dollar funds as banks need.
"Central banks will continue to work together to address pressures in global money markets," the Fed said in a statement.
The Bank of England and Bank of Japan made similar announcements on the provision of dollar liquidity.
Global demand for dollar funds rocketed after the collapse of Lehman Brothers in September unleashed the darkest and most serious phase of the global financial market crisis.
Central banks subsequently unveiled a series of coordinated measures to ease the pressure on the global financial system, including dollar liquidity operations, currency swaps and even interest rate cuts in October.
Indications are, however, that market stresses have since eased. Interbank lending rates have fallen and spreads -- such as the premium of interbank lending rates over expected policy rates, and interbank dollar rates over Treasury bill yields -- have narrowed sharply.
In light of this apparent easing in money market tensions, the ECB said it will scrap in January the FX swaps operations it had been holding in parallel with dollar liquidity provisions, due to a lack of demand.
"Given the limited demand, the operations in the form of EUR/USD foreign exchange swaps will be discontinued at the end of January but could be started again in the future, if needed in view of prevailing market circumstances," the ECB said in a statement.
The ECB's dollar liquidity provisions will continue to take the form of repurchase operations against ECB-eligible collateral and to be carried out as fixed rate tenders with full allotment.
The BoE, which consistently saw less demand from UK banks at its dollar auctions in recent months, also said it would provide banks with as much funds as they need but waning demand will keep further auctions under review.
"In the UK, there has been declining participation in the U.S. dollar repo operations recently, as access to dollar liquidity in the market has improved," the BoE said on Friday.
"The Bank will continue to conduct dollar repo operations, including its weekly tenders, as long as necessary but will keep them under review if market conditions continue to improve," it continued.
Operations would be carried out at a fixed rate with full allotment of all bids, the BoE added.