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Central banks push again to ease money market strains

Section: Daily Dispatches

By Krishna Guha, Ralph Atkins, and Chris Giles
Financial Times, London
Friday, May 2, 2008

Central banks in the US and Europe launched a fresh co-ordinated assault to ease strains in financial markets on Friday, as a fall in unemployment raised questions as to whether the US really was in recession.

The Federal Reserve said it was increasing the size of its credit auction facility -- which offers one-month loans to banks -- by half to $150 billion.

The Fed, the European Central Bank, and Swiss National Bank announced a near-50 per cent increase in currency swaps -- trading of euros and Swiss Francs for dollars -– allowing European authorities to provide more dollars to their banks.

Both moves are designed to target the stress in the interbank money markets, which remains intense despite progress in other credit markets. Libor, the main interbank borrowing rate, forms the benchmark for many loans to companies and individuals.

The US central bank also slightly widened the pool of securities eligible to be swapped into Treasuries through its securities lending programme.

New figures showed that the US economy lost only 20,000 jobs in April -- much less than in the previous three months and far fewer than the 80,000 expected -- while unemployment declined from 5.1 per cent to 5 per cent.

The jobs news sent Wall Street stocks to their highest levels of the year but they were showing signs of running out of steam by early afternoon. The Dow Jones Industrial Average and the S&P 500 were both up 0.3 per cent – which helped push the FTSE 100 up 2.1 per cent to its highest level since mid-January.

Carlos Gutierrez, US commerce secretary, told the FT: "This is another sign of the resilience of the US economy."

The central bank moves were initiated by the Fed, which believes that many of the strains in the dollar money markets reflect pressure from European banks that are structurally short of dollars. This view is questioned by European central bankers, who regard the problems as emanating largely out of the US, but they agreed to take part.

The Bank of England did not take part. It believes UK banks are not short of dollars, and its new special liquidity scheme will take care of their funding needs.

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