By Gavin Finch Oct. 17 (Bloomberg) -- The cost of borrowing dollars in London fell, capping the first weekly decline since July, after central banks around the world pumped unprecedented amounts of cash into money markets and governments backed loans. The London interbank offered rate, or Libor, for three- month loans in dollars dropped for a fifth day, sliding 8 basis points to 4.42 percent, the British Bankers' Association said. It declined 40 basis points this week. The overnight rate for dollars slid 27 basis points to 1.67 percent, the lowest level since September 2004. Asian rates also fell. ``Libor rates continue to edge down, bringing the prospect of some rejuvenated interbank lending that little bit closer, even if it is still some way distant,'' said Daragh Maher, deputy head of global currency strategy in London at Calyon, the investment-banking arm of French lender Credit Agricole SA. Rates fell this week after central banks joined forces to offer lenders an unlimited supply of dollars and the European Central Bank did the same with euros. Still, the cost of borrowing between banks remains near record highs relative to the Federal Reserve's benchmark rate of 1.5 percent. The spread between three-month dollar Libor and the Fed rate was 292 basis points, or 2.92 percentage points, up from 108 basis points a month ago. At the start of the year, the spread was 43 basis points. ``Money-market rates are slowly improving, though the glacial pace is a bit of a concern,'' said Adam Carr, senior economist in Sydney at ICAP Australia Ltd., a unit of the world's largest inter-bank broker. Gross Sees Declines The dollar rate will decline about 200 basis points as the U.S. begins implementing programs to buy short-term debt from corporations and distressed securities from financial institutions, according to Bill Gross, who manages the world's biggest bond fund. One-month dollar Libor will drop to about 2.25 percent, from 4.18 percent today, and the three-month rate to 2.65 percent, according to Gross. ``We're talking weeks here,'' Gross, who runs the Total Return Fund as co-chief investment officer of Pacific Investment Management Co., said in an interview on Bloomberg Radio from Newport Beach, California. While the reliability of the Libor-setting process has been criticized amid the global credit squeeze, it's used to determine rates on $360 trillion of financial products worldwide, from mortgages to company loans and derivatives. `Manipulated' Rates Libor is set by a panel of banks in a daily survey by the British Bankers' Association at about noon in London. Members provide estimates on how much it would cost to borrow in 10 currencies for terms from a day to a year. The Bank for International Settlements said in March some lenders may have ``manipulated'' rates to keep from appearing like they were in financial straits. In a further sign the freeze in credit markets may be thawing, institutions deposited less cash with the ECB overnight, the central bank said today. Banks lodged 205 billion euros ($275 billion) at 3.25 percent, down from a record 210.8 billion euros on Oct. 15. The daily average in the first eight month of this year was 425 million euros. Rates for one-month commercial paper fell to a three-week low. The average yields offered on the highest-rated commercial paper placed by dealers slid 48 basis points to 3.45 percent today, according to data compiled by Bloomberg. Rates dropped 83 basis points in the week to the lowest level since Sept. 26. Yields reached a nine-month high of 4.28 percent on Oct. 10. Commercial Paper Commercial paper is used by companies to meet short-term financing requirements. Money-market rates fell in Asia today. Hong Kong's three- month dollar price slid 15 basis points to 4.2 percent, the biggest drop in three weeks. Japan's one-month deposit rate dropped 25 basis points to 1.1 percent, heading for the biggest weekly decline since 2000. ``The market is starting to believe that central banks' policy actions are taking out some of the financial systemic risk,'' said Craig Saalmann, a Sydney-based credit strategist with JPMorgan Chase & Co. Lending between banks, which slumped after the collapse of the U.S. subprime-mortgage market last year, all but seized up after Lehman Brothers Holdings Inc. went bankrupt Sept. 15. The Libor-OIS spread, which measures the difference between the three-month dollar rate and the overnight indexed swap rate, was at 330 basis points today, up from 24 basis points on Jan. 24. The average was 8 basis points in the 12 months to July 31, 2007, before the credit squeeze began. Overnight indexed swaps are over-the-counter traded derivatives in which one party agrees to pay a fixed rate in exchange for the average of a floating central-bank rate during the life of the swap. For dollar swaps, the floating rate is the daily effective federal funds rate. The difference between what banks and the Treasury pay to borrow money, the so-called TED spread, fell to 359 basis points today, down from 464 basis points on Oct. 10, the most since Bloomberg began tracking the data in 1984. To contact the reporter on this story: Gavin Finch in London at gfinch@bloomberg.net

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