The Federal Reserve has taken a further step to meet the global demand for dollars, by establishing a mechanism that would allow central banks and international monetary authorities to conclude buyout agreements with the United States central bank.
The Fed said the new facility would work in tandem with the dollar lines already established by the central bank with counterparts in 14 different countries as the coronavirus pandemic spreads around the world.
As investors flocked to safe assets and companies struggled to offset the blow to revenue from widespread economic closings, they pushed the value of the greenback significantly higher, leading to a global shortage of dollars which has destabilized emerging markets.
“This facility is expected to help support the functioning of the US Treasury market by providing an alternative temporary source of US dollars other than free market securities,” the Fed said in a statement.
The temporary facility for foreign and international monetary authorities, or FIMA, will allow foreign central banks and international organizations with accounts at the New York Fed “to temporarily exchange their US Treasury securities held with the Federal Reserve for dollars Americans, which can then be made available to institutions in their jurisdictions, “the statement said.
This decision is part of a wave of actions taken by the Fed to contain the damage caused by the coronavirus to the United States and to world economies.
The US central bank lowered its main interest rate to almost zero, announced unlimited purchases of US treasury bills and mortgage-backed securities guaranteed by government agencies, and resuscitated a series of facilities dating back to the 2008 financial crisis to support troubled credit markets.
The Fed also has a crucial role to play in providing loans, loan guarantees and other assistance to American businesses as part of the $ 2 billion stimulus package recently adopted by Congress.
Internationally, the Fed established swap lines this month with the European Central Bank, the Bank of Japan and the Bank of England, and their counterparts in Canada and Switzerland. It then extended these facilities to other central banks, including Mexico, Brazil, Australia and Singapore.