Mar 20, 2023
Global Central Banks’ Daily Swap Lines Signal No Dash for Dollar
(Bloomberg) -- Global central banks witnessed no dash for dollars after uniting with the Federal Reserve to ease access to supplies of the US currency, an indication the latest bout of banking turmoil may not be causing undue stress to the financial system.
Offered the chance to secure dollars via the Fed on a daily basis rather than the typical weekly frequency, the Swiss National Bank awarded $101 million in a daily seven-day maturity repo operation, the most since October 2022, but well below previous times of broad funding strains.
The Bank of England and Bank of Japan received zero bids, while the European Central Bank allotted just $5 million to a single bidder. That compared to $469.5 million of bids in the ECB’s last weekly operation.
“It seems that the Fed and other central banks have taken very pre-emptive action here and we would not be at all surprised if demand at these dollar-supplying operations remains pretty modest,” said Steven Barrow, head of G-10 strategy at Standard Bank. “It appears that dollar funding pressure has been very limited so far.”
The actions came a day after the Fed and five counterparts pledged coordinated action to ensure dollars keep flowing around the world. They did so as UBS Group AG’s rescue of Credit Suisse Group AG became the latest chapter in a two-week run of turbulence in global banking, which threatens a fresh financial crisis unless beaten back.
The initiative enables international central banks to borrow supplies of the world’s reserve currency from the Fed in exchange for an equivalent amount of their local currencies. So-called dollar swap lines were first used extensively during the 2007-2008 crisis, but now are part of the regular playbook for central banks when trouble hits.
Fed and Global Central Banks Move to Boost Dollar Funding
The aim of doing so is to meet the needs of companies and financial institutions, which typically have obligations denominated in dollars or rush for the safety of the US currency when strains in the financial system or world economy emerge and access to money shrinks.
Frederik Ducrozet, head of macroeconomic research at Banque Pictet & Cie SA in Geneva, called the SNB amount “small,” while Piet Christiansen, chief strategist at Danske Bank A/S, said the ECB bid “seems more like someone was testing the system than actual liquidity need.”
There have been some signs of heightened tension within dollar funding markets over the past week and indications that banks are corralling their cash, but it has been a long way from panic and the financial plumbing has continued to work as intended.
US banks did tap the Federal Reserve’s emergency facilities for a record amount of money, eclipsing even the levels seen during the 2008 crisis, and they’ve also been hitting up the Federal Home Loan Banks system, which has been bolstering its war chest in an unprecedented way.
One of the most eye-catching consequences of the recent turmoil has been the huge shifts in rates of short-dated securities and there has been some evidence of moderate dislocations in the instruments where banks and others ordinarily go for their short-term money. Repurchase agreement rates were elevated for a number of days, cross-currency basis swaps have whipsawed and the gap between direct floating-rate agreements and index-tied ones — often used as a measure of the difficulty banks have in getting access to funds — also swelled. The apparent stress in these metrics has subsided a bit with the take-up of emergency measures, but there is still some signs of elevated tension.
The boost to swap lines will “enhance the provision of liquidity,” the central banks said in a statement on Sunday, describing the arrangements as “an important liquidity backstop to ease strains in global funding markets” and mitigate the impact on the supply of loans to households and businesses.
In March 2020, the Fed and others acted to ease a squeeze as demand for the dollar surged as the coronavirus spread. The service has also increasingly been offered to emerging markets too.
The latest arrangement has split analysts on what it means for monetary policy as the Fed prepares to set interest rates on Wednesday.
Case for Fed Pause Builds After Crisis-Echoing Move on Swaps
Former Fed Governor Larry Meyer is among those saying that it could make a rate hike less likely as it suggests “greater worry about the left-tail risk from financial contagion.” Others argue that by trying to ring fence the banking system, central banks should still be able to continue their campaign to slow inflation via higher rates.
An April 2022 study by economists Linda Goldberg and Fabiola Ravazzolo found that the swap lines do succeed in reducing “the sensitivity of global funding strain metrics to risk sentiment deterioration.”
However, making dollars available to foreign nations — even if it doesn’t cost the Fed — has in the past become a point of contention for some in the US Congress.
--With assistance from Bastian Benrath, Zoe Schneeweiss, Benjamin Purvis and Alexandra Harris.
(Adds information on funding market tensions.)
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