Fed opens liquidity lines with more central banks

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The Federal Reserve established temporary dollar liquidity-swap lines with nine additional central banks, expanding the rapid roll-out of financial-crisis-era programs to combat the economic meltdown from the coronavirus pandemic.

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.

The announcement followed the late Wednesday launch of a Fed facility to support money market mutual funds and comes as part of sweeping emergency measures the U.S. central bank has unleashed to support the economy from the coronavirus.

The Fed already has standing swap lines with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank.

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.
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.

The expansion of the dollar swap lines allows foreign central banks to meet the needs of companies and financial institutions rushing for dollars as the global payments system undergoes severe strain due to the coronavirus.

The Bloomberg Dollar Spot Index has soared the most since the financial crisis in 2008, reflecting enormous demand for the currency. The Fed had swap lines outstanding to 14 central banks in the financial crisis.

The dollar pared gains from earlier in the day after the announcement, while currencies such as Australia’s, New Zealand’s and Norway’s received some support following recent declines.

The swaps lines were initiated in 2007 as the credit crisis erupted, starting first with the main, developed nation central banks. As pressures on the global system intensified, the Fed expanded the availability to smaller, advanced economies and to emerging markets including South Korea and Brazil.

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.

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.

Bloomberg News