MONEY MARKETS-Dollar rates solid forward of Bernanke

Wed Feb 24, 2010 6:55am EST Related News TREASURIES-Dip in Asia, 2-yr/10-yr spread off record highTue, Feb 23 2010MONEY MARKETS-Bets on US rate hikes move out on Fed cuesMon, Feb 22 2010Fed seeks to calm markets after discount rate riseFri, Feb 19 2010MONEY MARKETS-Futures push rate hike bets sooner on Fed moveFri, Feb 19 2010Factbox: Fed"s exit strategy toolkitFri, Feb 19 2010

* Dollar Libor rates steady ahead of Bernanke * Fed chairman to face exit strategy grilling * Fed revives financing programme to drain funds By Kirsten Donovan and Vidya Ranganathan LONDON, Feb 24 (Reuters) - Benchmark dollar interbanklending rates held steady on Wednesday as markets waited to hearwhat Federal Reserve Chairman Ben Bernanke would say about thecentral bank"s exit strategy. Bernanke will testify before the House of RepresentativesFinancial Services Committee as part of his semi-annual reportsto Congress on the state of the economy. The Fed last week raised the rate at which banks can borrowfrom its overnight window to 0.75 percent from 0.50 percent, buttalk of a near-term rise in U.S. interest rates stemming fromthat discount rate hike last week has cooled. "Testimony from Federal Reserve Chairman Ben Bernanke todayshould underline the growing belief that there are signs ofimprovement in the U.S. economy but that support from low rateswill still be required for an extended period," said Nomura ratestrategist Charles Diebel. "Overall, the real focus will be on any suggestion offurther removal of exceptional measures as this has become a hottopic in the wake of the discount rate move by the Fed lastweek." Bernanke is expected to use the forum, formerly known as theHumphrey-Hawkins testimony, to reiterate the range of toolsavailable to the Fed to remove the extraordinary monetarysupport employed to deal with the crisis [ID:nN23153536]. The Fed not only slashed interest rates close to zero, butalso created a range of short-term lending facilities to boostmarket liquidity and purchased more than $1.7 trillion inTreasury bonds and mortgage-linked debt. The December fed funds contract <0#FF:> is the only one tofully factor in a Fed hike, although November had been in playuntil recently. SUPPLEMENTARY FINANCING The market will also look at anything Bernanke has to sayabout the revival of the Treasury Supplementary FinancingProgram (SFP) announced on Tuesday [ID:nN23111208]. First implemented in 2008, the facility was created to helpthe Fed undertake emergency lending to banks without affectingthe overall quantity of reserves in the financial system. Now,it will probably be used for the opposite purpose.[ID:nN23111208]. The revival of its $200 billion financing programme will bethrough eight auctions of $25 billion 56-day bills, beginning onWednesday. Analysts at Barclays Capital said the re-introduction of thesupplementary bills programme was to expand the Fed"s arsenal oftools to drain cash, so that fewer reverse repos and termdeposits are required when policy tightening begins in earnest. It did not seem intended either to drain a vast amount ofreserves or to push front end rates higher, they wrote. "Based on an estimated $800-1,000 billion in reservedraining, both reverse repos and term deposits programs willneed to be large, potentially introducing significantdistortions in short rate markets," Barclays said in the note. Three-month dollar Libor rates USD3MFSR= held steady at0.25194 percent, while equivalent euro rates EUR3MFSR= edgedlower to 0.60500 percent.

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