Fed leads unprecedented push by central banks to flood financial mart with dollars

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Oct 13: The US Federal Reserve led an unprecedented push by central banks to flood financial markets with dollars, backing up government efforts to restore confidence in the banking system.

The ECB, the Bank of England and the Swiss central bank will offer unlimited dollar funds in auctions with maturities of seven days, 28 days and 84 days at a fixed interest rate, the Washington-based Fed said today. The Bank of Japan may introduce "similar measures.'' The dollar declined and some money-market rates fell. Policymakers from the Group of Seven nations pledged at the weekend to take "all necessary steps'' to stem a market panic after the MSCI World stock index plunged 20 % last week. Central banks last week cut interest rates in tandem for the first time since 2001, the U.S. plans to buy $700 billion in distressed assets from banks and in Europe, the UK is leading a push to keep lenders afloat with taxpayers' money.

"By providing unlimited dollar funds they are acting on the back of the G-7 plan to ensure the system is fully liquidized,'' said Lena Komileva, an economist at Tullet Prebon Plc in London. "We're going to see even more liquidity provided and more aggressive rate cuts are coming.''

The dollar dropped after the announcement, falling as much as 0.9 % to $1.3671. The cost of borrowing in euros for three months declined to 5.32 % today from 5.38 %, according to the European Banking Federation. Stocks rallied worldwide, with the MSCI World Index climbing 2 %.

The London interbank offered rate, or Libor, that banks charge each other to borrow dollars for three months last week soared to 4.82 %, the highest level this year.

"Taken together, the latest moves increase the chances that we will begin to see some relaxation of the intense funding stresses,'' a team including Dominic Wilson, senior global economist at Goldman Sachs Group Inc. in New York, wrote in a note on Monday. "This is because bank solvency risk should decline as the government offers protection.'' Central banks are expanding their toolkits to push down money-market rates. The Fed on Oct. 7 said it will create a special fund to buy US commercial paper and the ECB last week said it would offer financial institutions unlimited euro funds. The Bank of England is scheduled to announce a revamp of its own money-market operations later this week.