The world's major central banks said on Tuesday they would extend emergency supplies of U.S. dollar funding to money markets, in a sign that authorities remain concerned about financial instability as governments grapple with debt problems.

The European Central Bank, the Bank of Japan, Bank of Canada, the Bank of England and the Swiss National Bank extended their U.S. dollar liquidity providing operations with the U.S. Federal Reserve until August 1, an indication they view the money markets as still fragile.

The swap lines, which had been due to expire next month, were established to ease strains in short-term money markets by ensuring banks do not have trouble obtaining dollars, although banks have used the lines relatively little since the middle of this year.

The Fed's policy-setting panel opened swap lines, first with the ECB and the SNB in December 2007 and later with other central banks, including those of Sweden, Mexico and Brazil.

These lines were discontinued in January this year because market conditions had improved, but in May the central banks decided to reopen the operations after the sovereign debt crisis ignited. Now they have been extended again.

They are designed to improve liquidity conditions in global money markets and to minimize the risk that strains abroad could spread to U.S. markets, the Fed said in a statement.

Analysts said that the move, which met their expectations, showed central banks cannot yet step down from the larger role they have assumed to stave off the financial crisis.

In a structurally fragile and interrelated global financial system, the running risk of unforeseen shocks elevates central banks' lender of last resort function to a systemically indispensable role, Tullett Prebon economist Lena Komileva said.

LOW DEMAND

The total use of the lines peaked at more than $580 billion in December 2008. Demand for Fed dollar swaps was high right after their reintroduction in May, with $9.2 billion scooped up on May 12, all through the ECB. However, since early June demand has been muted.

Last week the Fed said the only use for the swap line between it and the other central banks came from the ECB and amounted to $60 million, with an interest rate of 1.18 percent. It added it would continue to publish swap activity weekly.

The SNB has had no demand in its dollar repos since the May resumption.

Traders said the low demand was mainly due to the high rates that central banks charge, but viewed such a facility as useful.

The price is very high, but the facility is there and in situations where there are strains, everybody can use it as a backstop, the trader said.

In normal circumstances, you won't use that, but there could be a situation where lots of people need it.

The Bank of Canada said it did not need to use the facility at present, but it was prudent to maintain the agreement.

This shows that central banks are doing everything possible to prevent tension from reappearing, RBS economist Jacques Cailloux said. The situation remains fragile, so this is part of the prevention toolkit.

The swap lines are conducted on a full allotment basis with all the central banks participating, except for Bank of Canada, which has a maximum of $30 billion.

Many foreign banks and investors had depended on money markets to borrow dollars to cheaply fund their dollar-denominated longer-term investments.

After the collapse of Lehman Brothers, they found themselves scrambling for dollars to fund these obligations, driving up the dollar against local currencies and raising the spectre of widespread defaults.

In the currency swaps, the U.S. Fed offered dollars to foreign central banks in exchange for their currencies. The foreign central banks then lent the dollars to banks in their domestic markets, enabling firms to access dollars at a time when normal financing channels had shut down.

(Reporting by Sakari Suoninen; Editing by Hugh Lawson)

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