UPDATE 1-Dollar Libor strains continue to ease

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By Jamie McGeever

LONDON, May 7 (Reuters) - Dollar money market strains eased again on Wednesday, as recent action by the U.S. central bank to boost dollar liquidity throughout the financial system helped bring down interbank lending rates and narrow spreads .

All main three-month London interbank offered rates -- dollar, euro and sterling Libor -- fell on Wednesday, although the premium for sterling Libor over Overnight Index Swaps rates rose by almost five basis points.

Money market traders appear to have given the Federal Reserve's latest tweaks to its Term Auction Facility (TAF) operations the thumbs up.

The Fed said last week it will increase the size of the TAFs and extend their availability, as well as widening the scope of collateral it will accept for loans under the separate Term Securities Lending Facility program.

On Tuesday the Fed held a $75 billion TAF auction for 28-day funds, which drew a bid-to-cover ratio of 1.29. The stop-out rate was 2.22 percent, sharply below Wednesday's one-month dollar Libor of 2.62125 percent and the 2.87 percent rate at the TAF auction two weeks ago.

"With (Tuesday's) TAF auction in the U.S., the fact that it didn't have as many bids as people thought might come in seems to have given a bit of a breather to peoples unease in the U.S. Libor market," said one trader in London.

Three-month dollar Libor fell over two basis points to 2.73438 basis points <USD3MFSR=>, the British Bankers Association's latest daily fixing showed. That's the seventh consecutive daily decline.