HONG KONG, June 22 (Reuters) - Dollar funding costs edged higher on Tuesday as China's yuan slipped, dashing bets that Beijing may allow it to appreciate more rapidly after a pledge to make the currency more flexible.
China's announcement at the weekend had sparked a rally in global markets on Monday on hopes that the United States and other economies would be bolstered as their goods would become more competitive as the yuan appreciates.
But the gains fizzled overnight on concerns that Beijing will still keep the yuan on a tight leash, allowing only gradual, modest gains that would do little to stimulate more economic activity in the short-run.
The yuan slipped in spot market trading on Tuesday as big state-owned banks bought dollars and sold their own currency, indicating authorites were keen to control the pace of any gains a day after the central bank allowed it to surge nearly 0.5 percent.
Concerns about strains in the European financial system also persisted as the region's banks continued to hoard high levels of cash. Lenders' overnight borrowing from the European Central Bank jumped to a six-week high on Tuesday.
Three-month dollar rates in Singapore SIUSD3MD=ABSG firmed to 0.54233 percent from 0.54067 percent on Monday. They have remained within the same quarter-basis point range in June, wrapped around the 0.54 percent level, after rising 20 basis points in May.
But other money market stress indicators showed signs of stabilising, if not easing.
The 3-month LIBOR-OIS spreads, a risk barometer of dollar lending, narrowed one basis point to 33 bps, a two-week low.
U.S. two-year swap spreads USD2YTS=TWEB, which widen during times of financial stress, steadied at 32 bps, a one-month low.
The China revaluation story has probably flushed a lot of money market centres with excess dollar liquidity as many participants are buying Asian currencies and selling dollars, said Suresh Ramanathan, a strategist at CIMB Investment Bank.
Rates were expected to ease further on expectations that China's move to unshackle the yuan, regardless how slowly paced, would attract more capital inflows into the region.
The yuan on Monday posted its biggest rise since the currency's landmark revaluation in 2005. On Tuesday, the currency slipped as much as 0.37 percent before closing with a smaller loss.
Onshore swap rates rose, indicating liquidity concerns remained paramount.
Two-year non-deliverable interest rate swaps CNNDIRS2Y=TRHK fell 2 bps to 2.59 percent, a one-week low, while the two-year onshore IRS CNYQB3S2Y= rebounded 8 bps to 2.88 percent, nearly erasing Monday's drop.
ING said even with the likelihood of no interest rate hikes in China this year, bill yields will remain steady for now due to elevated policy uncertainty and Agbank's massive IPO, which starts taking subscriptions from July 1 and is expected to lock up at least 2 trillion yuan.
In India, three-month OIS rates INRAMONMI3M= resumed their rise to 18-month highs which were tested last week after the central bank's bond buyback auctions met with tepid demand.
Three-month rates rose 5 bps to 5.15 percent, not far from a peak of 5.21 percent hit last week.
With the government to sell 150 billion rupees in bonds this week and the central bank able to scoop up only 90 billion out of a projected 200 billion rupees bond buyback target in its last two auctions, traders said OIS rates will be pushed higher this week.