CENTRAL BANKS in the US and Europe launched a fresh coordinated assault to ease strains in financial markets yesterday, as a fall in unemployment raised questions as to whether the US really was in recession.

The US Federal Reserve said it was increasing the size of its credit auction facility - which offers one-month loans to banks - by half to $150 billion (€97 billion).

The Fed, the European Central Bank and Swiss National Bank announced a near-50 per cent increase in currency swaps - trading of euros and Swiss francs for dollars - allowing European authorities to provide more dollars to their banks.

Both moves are designed to target the stress in the interbank money markets, which remains intense despite progress in other credit markets. Libor, the main interbank borrowing rate, forms the benchmark for many loans to companies and individuals.

It is the third phase of co-ordinated liquidity action to be announced since last December, when some money market rates were nearing their highest levels in seven years. "In view of the persistent liquidity pressures in some term funding markets, the European Central Bank, the Federal Reserve, and the Swiss National Bank are announcing an expansion of their liquidity measures," the three central banks said in statements.

The US central bank also slightly widened the pool of securities eligible to be swapped into Treasuries through its securities lending programme to include triple A-rated asset-backed securities. It already accepted US Treasury and agency securities and agency mortgage-backed securities.

The central bank moves were initiated by the Fed, which believes that many of the strains in the dollar money markets reflect pressure from European banks that are structurally short of dollars. This view is questioned by European central bankers, who regard the problems as emanating largely out of the US, but they agreed to take part.

The Bank of England did not take part. It believes UK banks are not short of dollars, and its new special liquidity scheme will take care of their funding needs.

"The Fed has found what works best and is building on it," said TJ Marta, fixed income strategist at RBC Capital Markets. "It provides more impetus for markets to shift their focus from the financial market crisis to the real economy downturn." - (Financial Times service/Reuters)