By John Fraher and Simon Kennedy Oct. 13 (Bloomberg) -- The Federal Reserve led an unprecedented push by central banks to flood the financial system with dollars, backing up government efforts to restore confidence and helping to drive down money-market rates. The ECB, the Bank of England and the Swiss central bank will auction unlimited dollar funds with maturities of seven days, 28 days and 84 days at a fixed interest rate, the Washington-based Fed said today. All of the previous dollar swap arrangements between the Fed and other central banks were capped. ``By providing unlimited dollar funds they are acting on the back of the G-7 plan to ensure the system is fully liquidized,'' said Lena Komileva, an economist at Tullett Prebon Plc in London. ``We're going to see even more liquidity provided and more aggressive rate cuts are coming.'' Leaders of the world economy have redoubled efforts to unfreeze credit markets and avert the worst global recession in thirty years after last week's 20 percent slide in the MSCI World Index. Policy makers from the Group of Seven nations pledged at the weekend to take ``all necessary steps'' to stem a market panic and European governments are today announcing plans to avert a banking collapse across the region. The cost of borrowing in dollars for three months today fell to 4.75 percent from 4.82 percent, the highest this year. The rate for euros over the same timeframe declined to 5.32 percent from 5.38 percent. `Funding Stresses' On foreign exchange markets, the dollar dropped as much as 0.9 percent against the euro, declining o $1.3671. Stocks rallied worldwide and the MSCI World Index climbed 2 percent. ``Taken together, the latest moves increase the chances that we will begin to see some relaxation of the intense funding stresses,'' Dominic Wilson and other economists at Goldman Sachs Group Inc. wrote in a note today. ``This is because bank solvency risk should decline as the government offers protection.'' As well as slashing interest rates in concert last week, global central banks are expanding their toolkits to push down money-market rates. The Fed on Oct. 7 said it will create a special fund to buy U.S. commercial paper and the ECB last week said it would offer financial firms unlimited euro funds. The Bank of England is scheduled to revamp its own money-market operations later this week. Until now, central banks and governments have failed to gain traction in markets, with investors criticizing them for adopting a scattershot and uncoordinated approach. `Work Together' The ECB, the BOE and the Swiss National Bank ``can provide U.S. dollar funding in quantities sufficient to meet their demand'' into 2009, the Fed said today. The Bank of Japan may introduce ``similar measures.'' The aim is to keep the financial system flowing with the world's reserve currency. Banks are hoarding cash for fear they will lose the money if it's loaned or held elsewhere, or because they need it for their own funding needs. ``Central banks will continue to work together and are prepared to take whatever measures are necessary to provide sufficient liquidity in short-term funding markets,'' the Fed's statement said. What began last December as a $24 billion arrangement between the Fed, the ECB and Swiss National Bank was ramped up over the past year to $620 billion and broadened to include central banks from the Norway to Australia. Today's ``action is unprecedented,'' said Neil Mackinnon, chief economist at ECU Plc in London and a former U.K Treasury official. Andrew Milligan, who helps oversee about $260 billion as head of global strategy at Standard Life, said it's a ``much more important'' move than the coordinated rate cut. Urgent Action G-7 finance chiefs pledged Oct. 10 to take ``urgent and exceptional action'' after stocks plunged and as a global recession looms. European leaders yesterday agreed to guarantee new bank debt and use taxpayer money to keep distressed lenders afloat. Germany, for example, will shoulder loan guarantees worth 400 billion euros, spend 70 billion euros to recapitalize banks in trouble and set aside 30 billion for any unanticipated deterioration in lenders' finances, an official said today. Royal Bank of Scotland Group Plc, HBOS Plc, and Lloyds TSB Group will get an unprecedented 37 billion-pound ($64 billion) bailout from the U.K. government. The U.K. stole a march on its counterparts by saying last week it would guarantee lending between banks and invest in lenders. U.S. Proposal The U.S. Treasury will today flesh out its new proposal to buy stakes in financial firms. The official in charge of implementing the $700 billion financial-rescue program approved by Congress, Neel Kashkari, speaks at 8 a.m. in Washington. U.S. Treasury Secretary Henry Paulson said three days ago he wants to implement his new plan to buy stocks in a ``broad array'' of companies as soon as he can. The collapse of New York-based Lehman Brothers Holdings Inc. precipitated the latest chapter of the 14-month crisis, causing banks to stop lending to each other out of concern they may not get their money back. The world's largest financial companies have posted more than $635 billion in writedowns and credit losses since the start of last year after the U.S. housing market slumped. Today's move by central banks is ``another welcome measure,'' said Ross Walker, an economist at Royal Bank of Scotland Group Plc in London. ``We'll have to see what comes out of it. We all expect more rate cuts, whether they're coordinated or not is another matter.'' To contact the reporter on this story: John Fraher in London at jfraher@bloomberg.net; Simon Kennedy in Washington at skennedy4@bloomberg.net

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