Money markets traders pare us rate hike bets after weak data

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(Adds analyst quote, updates market action)By Richard LeongNEW YORK Nov 13 U.S. interest rates futures hit session highs on Friday as traders pared bets on the Federal Reserve tightening monetary policy following weaker-than-expected October data on domestic retail sales and producer prices. Cost for banks to borrow dollars remained elevated with the three-month London interbank offered rate rising its highest level since September 2012. Rates futures implied traders see a 66 percent chance the central bank will raise interest rates from near zero for the first time in nine years at its December 15-16 policy meeting. This was lower than 70 percent at Thursday's close, according to CME Group's FedWatch program. On Friday, the U.S.government said retail sales edged up 0.1 percent last month, falling short of a 0.3 percent increase forecast among analysts polled by Reuters, while producer prices fell 0.4 percent last month, compared with an expected 0.2 percent increase.

While rates futures firmed a tad, borrowing costs for dollars ended higher on the week as banks sought to restrain their wholesale lending as year-end approaches, analysts said. In the $5 trillion repurchase agreement market, interest rates finished at 0.23 percent, up from 0.18 percent on Thursday and 0.15 percent from a year ago, according to ICAP.

In the currency market, the interest rate spread on a three-month swap contract to exchange euro-denominated payments for dollar-pegged payments hovered at its widest level since July 2012. Banks and hedge funds use these products for currency bets, while U.S. companies use them to hedge their non-dollar denominated bonds. The cost premium, measured by the three-month London interbank offered rate on dollars over the three-month rate on euros, was unchanged on the day at minus 45 basis points on Friday, according to ICAP.

Three-month dollar Libor climbed to 0.36360 percent, while its euro counterpart held at a record low of minus 0.09214 percent. Money market reform has likely resulted in higher costs for foreign banks to borrow dollars, as some money funds have pared or shed their holdings of commercial paper, certificates of deposits and other non-Treasury securities, analysts said. This may have led some European banks to rely on cross currency swaps to access dollars, said Andrew Hollenhorst, a Citi interest rates strategist."Foreign banks that source USD