The European Central Bank mounted a second day of action to calm panicky credit markets on Friday, after Asia central banks joined a global campaign by monetary authorities to inject extra cash into banking systems.
The ECB said it would add money through the weekend to calm markets, saying it aims to assure orderly conditions in the euro money market. The Swiss central bank also offered money at below-market rates.
The news helped steady nervous trading in European money markets, where a record-setting ECB injection of 94.8 billion euro ($130.6 billion) cash on Thursday was due to flow out of markets.
In Asia trading, the Bank of Japan and the Reserve Bank of Australia have added more money than usual to prevent short-term rates from spiking, albeit on a much smaller scale than the ECB's amount.
What the central banks are doing is a concerted effort to inject liquidity. And the worrying thing is that they do that when the system is not functioning the way it should, said Jimmy Koh, a currency strategist at United Overseas Bank.
At the same time, Malaysia, Indonesia, the Philippines and Taiwan stepped in to support their currencies by selling U.S. dollars, traders said, as escalating credit market worries hit risky assets around the region.
The moves came after the ECB pumped a record amount of cash into Europe's money markets to make sure that banks had adequate short-term funds for lending. The U.S. Federal Reserve followed suit on a smaller scale.
The trigger was news that France's biggest-listed bank, BNP Paribas, had frozen $2.2 billion worth of funds hit by U.S. subprime mortgage woes.
On Friday, the ECB said it would offer money for three days at a variable rate, with minimum bids of 4 percent due by 4:50 a.m. EDT. For the second day in a row, it set no limit on how much.
Investors fear the damage caused by the U.S. subprime meltdown runs deeper than originally estimated and will put an even tighter squeeze on credit markets worldwide.
The central bank actions calmed money markets, but more subprime problems are likely to surface in coming weeks, said Moe Ibrahim, a fund manager with The Asia Debt Fund in Singapore, which manages about $365 million.
There's a variety of scenarios you can envision, all the way from it being a relatively contained phenomenon to something which has much broader implications that cause the world to collapse like a deck of cards, he said.
A Bank of Japan official said the bank injected funds at its regular money market operation on Friday due to a slight rise in the benchmark overnight call rate. The bank for the world's second-largest economy offered to supply 1.0 trillion yen ($8.45 billion) in funds -- at the higher end of market expectations.
The Reserve Bank of Australia pumped more than twice the usual amount of money into the banking system, injecting A$4.95 billion ($4.19 billion).
The banks acted to ensure there were enough funds for money markets to operate smoothly and to prevent short-term rates from spiking. The moves did not represent a substantive shift in monetary policy, analysts said.
But financial markets took a battering, in part because the unusual ECB move unsettled traders.
Asian stocks fell sharply and the yen extended its gains as investors dumped riskier assets. The flight to safety shored up Japanese government bonds and U.S. Treasuries.
Elsewhere in the region, central banks pledged to open the tap on the first signs of a seizure in money markets.
The Bank of Korea's head of monetary policy, Jang Byung-wha, told Reuters the central bank was ready to act to maintain stability in the local financial system, such as supplying extra funds, if a credit crunch arises.
The South Korean won hit a two-month low against the dollar after a senior Bank of Korea official said the central bank would not sell dollars to support the currency, breaking with the regional trend.
Singapore also said that it was ready to inject cash, but noted it saw no problems for now.
If there are liquidity bottlenecks, certainly we will come in to inject more liquidity. At this stage, the liquidity management is unchanged, Ong Chong Tee, deputy managing director of the Monetary Authority of Singapore, told a news conference.
Traders said that while the monetary authority had not directly injected any funds it had left the surplus cash in the market. The MAS was not immediately available for comment.
The Hong Kong Monetary Authority said it saw no need to pump money into the banking system but was monitoring markets. Hong Kong short-term interbank rates jumped as market liquidity tightened.
(With additional reporting by Saeed Azhar and Vidya Ranganathan in Singapore)