WSJ: Fed to End Dollar Swaps With Other Central Banks

Thursday, January 21, 2010

I don't know what it will mean for the value of Federal Reserve Notes (FRN) expressed in other unbacked fiat currencies, but the Fed will end its half trillion dollar swap trades with various other central banks (notably the ECB), the Wall Street Journal reports:
The Federal Reserve is on track to end a program, begun during the financial crisis, that provides U.S. dollars to institutions overseas through foreign central banks.

In the depths of the crisis, the Fed shipped more than $500 billion overseas through arrangements with other central banks, in exchange for their currencies. Such lending is down sharply and officials expect to end the program according to plan on Feb. 1.

As of January 13, the Fed held $5.9 billion in dollar "swap" agreements with foreign central banks, down from $63 billion in early September and $583 billion in late December 2008 as the financial crisis was worsening.

Before the crisis, many foreign financial institutions depended on short-term money markets to borrow dollars to fund their holdings of U.S. dollar assets, like mortgage-backed securities. These markets froze when the crisis hit and many foreign banks and investors found themselves short of the dollars they needed to finance their holdings.

The central banks stepped in, with the Fed offering dollars to foreign central banks like the Bank of England and the European Central Bank, which in turn lent dollars to financial institutions in their local markets. The move helped to stem the credit-market panic.

The Fed said in December it was "working with its central bank counterparties to close its temporary liquidity-swap arrangements by February 1." With the Fed's next policy meeting coming on Tuesday, Jan. 26th, and Wednesday, Jan. 27th, it is likely to formally announce plans to shut the program down.
Given that the Fed has reduced its exposure to a few billion - what's a billion in a world drowning in Trillions of debt - this appears to be a rather technical matter.


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