The rate at which banks lend to each other leapt to 10-month highs yesterday, marking their declining confidence as the fear of contagion sweeps Europe.
The London interbank offered rate, or Libor, for three-month loans in dollars hit 0.536 per cent. This was up from 0.509 per cent on Monday, according to the British Bankers' Association (BBA), marking an 11th straight day of rises of the rate. Libor is set by a daily BBA survey of 16 banks.
Peter Dixon, an economist at Commerzbank, said: "The moves reflect fears over banking liquidity, and that has driven up the spreads."
Mr Dixon also speculated that dollars were in such high demand – with a flight from the euro – that investors were willing to pay over the odds for them in the current markets.
The rise in Libor, marking the banks' reluctance to lend to each other, contributed to the gloom across global markets yesterday. Analysts from BNP Paribas said the issue could be addressed by central banks "but so far banks have provided currency swaps at penalty rates only," before adding: "That could be a mistake and may keep the dollar term money market tight, pushing the dollar even higher."