Central banks today progressively withdrew the cash they recently injected into money markets as the focus of the global credit storm rolled into emerging markets and currencies.
For the first time since last Thursday the European Central Bank, like the US Federal Reserve a day earlier, gave no extra short-term money to keep the financial system operating smoothly and central banks in Japan and Switzerland actively drained cash from their local markets.
But as stocks slid from Tokyo to London, major currencies tumbled against the Japanese currency and emerging market assets reeled, analysts said they were concerned an even bigger crisis than a liquidity squeeze was brewing.
"The turmoil in financial markets continues with a greater contagion in Asia, emerging markets and investment grade credit," Tullett Prebon G7 economist Lena Komileva said.
Emerging Asian central banks took further steps to smooth trade in the region's currency markets as ongoing credit fears hit stocks and sent the yen to a 4-1/2-month high.
"Our view (is) that this market correction will take longer than previous episodes which carries risks that it could presage a greater liquidity crunch in September when capital markets normally experience a seasonal pick-up in activity," Ms Komileva said.
Central banks around the world have pumped hundreds of billions of dollars of extra funds into markets to ease worries about the widening impact of the US subprime mortgage crisis, which threatened to paralyse credit markets.
Since then they have eased back on the choke, withdrawing much of the extra cash. ECB President Jean-Claude Trichet said yesterday money market conditions had progressively returned to normal, although the central bank would continue to watch developments closely.
The ECB, which had flagged each of its four special short-term funding operations since last Thursday by 10.30am, had made no such announcement by that time today.
Banks repay €7.7 billion from the last one-day injection today but also get access to €310 billion in regular funding which will stay in the system for a week.
Earlier today the Bank of Japan aggressively drained funds from the banking system for the second straight session and traders said the Swiss National Bank also mopped up liquidity.
The Fed and the Bank of Canada refrained from topping up liquidity and money market rates in both euros and dollars were back around normal levels in European trade.
"The overnight money market has normalised a little and the fact that the BOJ is prepared to drain cash seems to suggest that the market has steadied," said David Cohen, economist at Action Economics.
"Central banks seem to be implicitly assuming that as long as the credit turmoil doesn't spiral out of control and doesn't interrupt the availability of real sector financing there is enough momentum in the global economy."
Central banks in Malaysia, Indonesia and the Philippines were suspected of intervening once again, selling dollars to slow the declines in their currencies.