Central banks of six countries slashing rates on US dollar swap lines

The US Federal Reserve and its five counterparts have united to ensure that dollars keep flowing around the world after the coronavirus emergency sparked a rush for greenbacks, Report informs, referring to Bloomberg.

In coordinated statements on March 15, the Fed, Bank of Japan, European Central Bank, Swiss National Bank, Bank of Canada and Bank of England said they would use their swap lines to support the international supply of the world’s reserve currency. They added a weekly offering of dollars over a longer maturity and reduced the cost of the facility.

The aim is 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 soared the most since the financial crisis in 2008 last week, reflecting enormous demand for the currency.

“For international financial markets, where the US dollar dominates as an international currency, strong US leadership in containing global market disruptions is still essential,” said Shigeto Nagai, chief Japan economist at Oxford Economics in Tokyo, who previously worked at the Bank of Japan. “I initially worried that the US-first Trump administration might hesitate.”

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

The expansion of the swaps line was one of a string of stimulus measures unveiled by the Fed in an emergency move on March 15. To increase the effectiveness of the facility, the ECB, BOJ, and other counterparts will each auction the dollars they get for 84-day terms - in addition to the current one-week period. The rate was cut by a quarter percentage point to 25 basis points over the overnight index swap rate.

“The new pricing and maturity offerings will remain in place as long as appropriate to support the smooth functioning of US dollar funding markets,” the joint statement said.

The move will not immediately help emerging markets also struggling to obtain dollars, with currency depreciation threatening to pile on strains of servicing foreign debt.