Money markets key libor dollar rate slows rise, repo rates elevated

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(Adds J. P. Morgan Libor forecasts, byline)By Richard LeongNEW YORK Aug 14 A key interbank lending rate rose at a slower pace on Friday following its biggest single-day increase in more than five years, while overnight borrowing costs for Wall Street remained elevated. The London interbank offered rate for three-month dollar borrowings climbed to 0.32445 percent, the highest since October 2012, from Thursday's fixing of 0.32050 percent. The 0.4 basis point rise was less than half its 1.1 basis point jump on Thursday, which was its biggest gain since May 2010. This benchmark rate for $350 trillion worth of financial products has been posting a series of multi-year peaks as traders have anticipated the U.S. Federal Reserve would raise interest rates by the end of the year. J. P. Morgan analysts forecast on Friday if the U.S. central bank were to raise rates in its September 16-17 policy meeting, three-month dollar Libor would rise to 0.55 percent.

One-month Libor and six-month Libor would climb to 0.46 percent and 0.84 percent, respectively, compared with 0.19960 percent and 0.52490 percent on Friday, the analysts said in a research note. Meanwhile, the interest rate on U.S. repurchase agreements was last quoted at 0.23 percent to 0.26 percent early Friday , compared with 0.25 percent late Thursday, according to ICAP.

In the repo market, money funds and other investors make short-term loans to banks and Wall Street dealers. Banks and dealers pledge Treasuries and other securities as collateral. The U.S. Treasury Department this week sold $64 billion in bonds for its quarterly refunding to mixed results. Typically, Wall Street dealers who buy bonds at auctions seek funding in the repo market until they settle.

In the derivatives market, interest rate futures fell as jitters about China's devaluation of its currency earlier this week abated. The surprise move in a bid to help Chinese exporters roiled financial markets worldwide and stoked bets the Federal Reserve would delay an interest rate increase. Beijing took steps to ease concerns about further devaluation, but some analysts remain wary. The yuan held steady versus the greenback on Friday, but booked a record 2.9 percent weekly loss. U.S. interest rate futures suggested traders expect a 45 percent chance the Federal Reserve will raise rates at its Sept. 16-17 meeting, up from 39 percent on Thursday, according to CME Group's FedWatch program.