* Interbank dollar rates continue to ease
* Bank of Japan cuts rates, ECB seen following next week
* 3-mth dollar deposit rates indicated at 2.7-3.8 percent
LONDON, Oct 31 - The interbank cost of borrowing dollars eased again on Friday as central banks across the world made the currency more easily available and continued to cut borrowing costs.
There are signs the U.S. Federal Reserve's massive expansion of U.S. dollar swap lines with other central banks were working to ease liquidity pressures in global markets, a top Australian policy maker said on Friday.
"Overall, it appears this has had some success with conditions in the U.S. dollar swap market improving over the last few weeks, and the cost of U.S. dollar funding declining to more normal rates," Reserve Bank of Australia Assistant Governor Guy Debelle said. See [ID:nSYU005415]
Just this week, the Fed established $30 billion of swap lines each with central banks in Brazil, South Korea, Singapore and Mexico.
The high costs of short-term borrowing and a seizing-up of interbank markets reflects banks lack of trust in each other and squeezes on credit available for companies and individual customers.
The Bank of Japan was the latest central bank to lower interest rates, reducing its overnight call rate target to 0.3 percent from 0.5 percent, following similar moves by the U.S. Federal Reserve and central banks in China, Hong Kong and Taiwan this week. See [ID:nTKU003142]
The European Central Bank and Bank of England are also expected to follow suit at policy meetings next week, with ECB policymakers saying a cut is possible as euro zone economic growth looked set to ground to a halt next year.
"On the dollar side, we're expecting to see further declines in the Libor rates, certainly at the front end today. It looks like the one month towards three months is likely to drop 10-15 basis points," said Kenneth Broux, financial market economist at Lloyds TSB in London.
Also helping sentiment was news that British bank Barclays Plc <BARC.L> had raised 7.3 billion pounds ($12.1 billion) from investors from Qatar and Abu Dhabi and others, allowing it to avoid taking government rescue cash.
"It shows there is an appetite for certain types of credit and that it's not just governments that are out there providing liquidity," Broux added.
In early London trading, interbank rates for overnight dollar deposits <USDOND=> were indicated in a range of 0.05-0.45 percent, from 0.05-0.5 percent early on Thursday.
Three-month dollar deposit rates were indicated in a range of 2.7-3.8 percent compared with 3.2-4.0 percent <USD3MD=> and rates for three-month sterling <GBP3MD=> and three-month euros <EUR3MD=> also edged lower.
But financial institutions continued to prefer dealing with their central banks rather than each other. Overnight deposits at the ECB soared to a fresh record high of 244.9 billion euros, way up from the 215.9 billion euros deposited the previous session, while U.S. banks' borrowings at the Fed's discount window remained near historically high levels.
MORE SIGNS OF THAW
On Thursday, the British Bankers' Association's fixing of London interbank offered rates (Libor) for overnight dollars <USDONFSR=> eased to 0.73125 percent, its lowest since at least 2001, with the three-month rate <USD3MFSR=> falling to 3.19250 percent.
"Recovery in Libor fixings continued across the board. Fixings are finally on track to follow the policy rates," said Laurence Mutkin, analyst at Morgan Stanley in London.
Mutkin noted the U.S. commercial paper market -- a vital source of short-term funding for companies and banks -- was also starting to respond to the Fed's financial rescue efforts with the weekly outstanding amount finally picking up for the first time in seven weeks [ID:nN303144].
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