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Dollar Libor rates were steady on Tuesday as Federal Reserve officials met to assess their controversial bond buying program against a backdrop of fresh tax cuts that could lift U.S. economic growth.
The central bank is not expected to signal any shift away from its intention to buy $600 billion in government debt but markets are already bringing forward expectations of when the Fed may start to raise interest rates.
Eurodollar futures fell to three-month lows this week and two-year Treasury yields are at their highest level in five months.
"We think the increase in Fed hike expectations is overdone, the market has priced in a possibility of hikes as early as the second half of 2011," Barclays Capital strategists said.
"The FOMC is likely to reiterate its message of extremely easy policy ... and that could be a catalyst for reversal of some of the recent outsized moves."
Dollar funding costs are easing meanwhile as year-end strains in money markets ease. Benchmark three-month dollar Libor rates were little changed at 0.30188 percent, near their lowest level this month.
Funding costs had increased in recent weeks as banks and companies from the euro zone's highly indebted nations paid-up to secure cash as worries about financial stability grew again.
Five-year euro/dollar cross-currency basis swaps -- which show the rate charged when swapping euro interest payments on an underlying asset into dollars -- eased to 38 bps from recent extremes of -41 bps, but that is still elevated compared with -21 bps at the start of November.
The central bank is not expected to signal any shift away from its intention to buy $600 billion in government debt but markets are already bringing forward expectations of when the Fed may start to raise interest rates.
Eurodollar futures fell to three-month lows this week and two-year Treasury yields are at their highest level in five months.
"We think the increase in Fed hike expectations is overdone, the market has priced in a possibility of hikes as early as the second half of 2011," Barclays Capital strategists said.
"The FOMC is likely to reiterate its message of extremely easy policy ... and that could be a catalyst for reversal of some of the recent outsized moves."
Dollar funding costs are easing meanwhile as year-end strains in money markets ease. Benchmark three-month dollar Libor rates were little changed at 0.30188 percent, near their lowest level this month.
Funding costs had increased in recent weeks as banks and companies from the euro zone's highly indebted nations paid-up to secure cash as worries about financial stability grew again.
Five-year euro/dollar cross-currency basis swaps -- which show the rate charged when swapping euro interest payments on an underlying asset into dollars -- eased to 38 bps from recent extremes of -41 bps, but that is still elevated compared with -21 bps at the start of November.
