U.S. federal fund futures rose for the second day in a row on Friday as investors continued to push back expectations for the timing of a Federal Reserve interest rate hike on the back of a benign inflation report.
Futures on Friday were showing an implied fed funds rate of about 0.39 percent in September, down from an implied rate of about 0.43 percent on Thursday. The September futures contract was very near the all-time highs reached in late November.
Friday's rise followed a government report showing the consumer price index rose by 0.1 percent in December after a 0.4 percent increase in November. The slight rise in prices was seen as tame enough that the Fed will not have to raise rates anytime soon from the current level near zero to combat inflation.
CPI does not appear to be flashing significant inflationary pressure ... the Fed has nothing to worry about now, said Michael Woolfolk, senior currency strategist at BNY Mellon in New York.
The Fed has held rates at the ultra-low level of zero to 0.25 percent since December 2008.
Meanwhile, the interbank cost of borrowing three-month euro funds hit a fresh low on Friday as investors expected accommodative euro zone interest rates for some time to come.
The European Central Bank left its policy rate steady at a record low of 1.0 percent, as expected, on Thursday.
ECB President Jean-Claude Trichet indicated at a news conference after the rate decision that copious liquidity would remain for some time. But Friday was the first time investors could react via the London Interbank Offered Rate fixings.
The three-month euro London interbank offered rate was set at 0.62750 percent, down from 0.63188 percent on Thursday.
We have hit a new record low on the euro Libor every day this year so far, and I see this trend continuing for some time, said Christoph Rieger, interest rate strategist at Commerzbank in Frankfurt.
Overnight euro Libor rates are anchored below 0.3 percent and I think short-rates will remain low and perhaps even fall further. That will lead to the ECB's policy rate staying stuck at 1.0 percent until the second quarter of this year, Rieger added.
At the London fixings on Friday, the equivalent dollar rate was unchanged at 0.25125 percent for the sixth consecutive day, while three-month sterling funds cost 0.61000 percent for the fourth successive day.
Earlier, the three-month Euribor was fixed at 0.68 percent in Frankfurt, hitting a record low.
The fall in the euro rate was driven by ample liquidity, lower volatility and diminishing risk of a rate hike in the foreseeable future.
Euro Libor continues to press south. Trichet said the ECB didn't discuss the six-month loan conditions, and won't until the March meeting, which has given the money market more reassurance that the liquidity situation was unlikely to change until then, said Peter Chatwell, a market analyst at Calyon in London.
(Additional reporting by George Matlock in London and Steven C. Johnson in New York; Editing by Chizu Nomiyama)