The US Federal Reserve has opened the taps for central banks in nine additional countries to access dollars in response to the current unstable financial system.
US Dollars have been in huge demand – and tight supply – in markets outside US borders as banks, companies and governments scramble to secure them to service the dollar-denominated debts many have accumulated. That has sent dollar-funding costs spiraling and has led to a historic run-up in the dollar’s value against other currencies.
The new facilities total $60 billion for central banks in Australia, Brazil, South Korea, Mexico, Singapore, and Sweden, and $30 billion each for Denmark, Norway, and New Zealand. The swap lines will be in place for at least six months.
This is a combined total of $US450 billion, money to ensure the world’s dollar-dependent financial system continues to function.
Those countries were given swap lines during the 2007 to 2009 crisis, and the Fed has permanent swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank.
The Fed said the new swap lines “like those already established between the Federal Reserve and other central banks, are designed to help lessen strains in global US dollar funding markets, thereby mitigating the effects of these strains on the supply of credit to households and businesses, both domestically and abroad”.
US dollar credit to non-bank borrowers outside the United States grew by 4 per cent year-on-year at end-June 2019 to reach $US11.9 trillion, according to the BIS.
This helps to underscore the status of the US dollar as a reserve currency.
Making dollars available to foreign nations — even if it didn’t cost the Fed — became a point of contention for some in the U.S. Congress, says Bloomberg.
The central bank had to repeatedly defend the action and explain to lawmakers that U.S. taxpayers were not lending foreign nations money and that because these were swaps — not loans — there was no risk of default.
– Some commentators thought that these swaplines were meant to bail out e.g Europe and Canada. The US Congress seems to have the same thoughts and they are all wrong.
– These swaplines are meant to prevent US interest rates from rising dramatically. Countries around the world DO have USD reserves and these reserves are invested in US securities (e.g. US T-bonds). When there is a (very) strong demand for USDs then those countries will be forced to sell those USD denominated securities in order to get their hands on USDs.
– Just imagine what happens when all countries sell all their USD denominated securities in order to get their hands on USDs. Rising US interest rates, anyone ??? So, those swaplines are predominantly meant to save Uncle Sam’s “rear end” (think: interest rates) from “getting burnt”.
– People think that having the world’s reserve currency brings the US only advantages and they are wrong. The example above is one “negative” of having the world’s reserve currency.