Heavy take-up of Fed swaps eases strains on dollar

The dollar is on track for its largest weekly decline in more than a decade, falling sharply after central banks exploited the Federal Reserve’s swap lines at the fastest pace since the financial crisis.

The Fed has revived 14 swap lines with other central banks since the start of the coronavirus crisis, in an attempt to alleviate a global shortage of dollars that had threatened to push the uncomfortably high currency at a difficult time for the Mondial economy.

Five central banks borrowed more than $ 200 billion from the facility during the week ending March 25, up from just $ 45 million the previous week, helping to ease them financial constraints in their local markets. The European Central Bank and the Bank of Japan have both attracted the most dollars since 2009.

“Central banks quickly responded to the demand for dollar funding and in doing so prevented a more destabilizing liquidity crisis,” said Paul Meggyesi, head of FX strategy at JPMorgan in London.

The US currency had risen so high that some analysts began to warn of the risk that central banks would sell dollars directly into the market to weaken it. But after breaking out in 50 years High on a trade-weighted basis, the dollar index weakened to 99.75 from 102.95 on March 19, losing 3% in one week.

The measure of the cost of borrowing in dollars, the base of the currencies, remained high against the Canadian and Japanese currencies, but the previously extreme explosion in spreads in the euro and pound markets stabilized , allowing these currencies to regain ground against the dollar. The pound rallied to trade above $ 1.23 after hitting several decades of lows below $ 1.15 last week, while currencies like the Australian dollar also rebounded.

During the month of March, companies looked for dollars to help cushion the blow of lost income due to the pandemic crisis, while investors looked for the US currency for its tendency to climb in times of stress.

The huge demand threatened to introduce stress into other parts of the financial markets. In response, the US central bank reactivated the swap lines with the Bank of Canada, the Bank of England, the Swiss National Bank, the ECB and the BoJ, and then widened the scope of the facility to include several emerging countries.

Despite the decline in the dollar exchange rate, the currency is still 2.5% stronger than at the start of the year. Eric Robertsen, global head of currency, interest rate and credit research at Standard Chartered Bank, said the magnitude and magnitude of recent dollar gains suggests that financial markets are “severely disrupted.” As such, he said, the currency has become the “barometer of the effectiveness of the political response to the credit difficulties of businesses” [and] challenges of interbank financing ”.

In addition, JPMorgan’s Meggyesi noted that since the last financial crisis, US dollar borrowing has exploded, led by emerging market companies and governments. Any rise in the dollar makes these debts more expensive to repay.

Bank of America strategists Merrill Lynch said commercial banks in Japan, in particular, have increased their dollar-denominated borrowing to levels that make use of the BoJ in dollars “very limited” in relation to exposure of the sector.

“[The swap lines] will not do much to address a perhaps more important underlying problem, namely the currency mismatch on the books of end users such as non-US companies with dollar commitments, “said Meggyesi .

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