Fed and Global Central Banks Take Action to Boost Dollar Funding

Sunday’s announcement by the Federal Reserve and five other central bank members to increase liquidity in US dollar swap agreements was the latest attempt by policymakers to alleviate growing financial stress.

The central banks participating in dollar swaps will “increase frequency of 7-day maturities operations from weekly to daily,” said the Fed in a joint statement with the Bank of Canada and the Bank of England.

This announcement was made ahead of opening Asian financial markets, which is likely to prompt action and calm fears among global investors.

U.S. and European equity forwards saw small gains. However, the dollar fluctuated and Treasuries dropped in Asia Monday as investors considered the weekend’s efforts to protect the global banking system. UBS Group AG had earlier Sunday agreed to purchase Credit Suisse Group AG through a government-brokered transaction.

These arrangements have been made available by the US central bank when dollars are scarce. This can happen because banks located outside the US often have obligations in greenbacks and have less access to dollars funding in times of financial stress.Alicia Garcia Herrero is chief Asia-Pacific economist at Natixis SA. She stated that the liquidity injection is “very important” for European and Swiss central banks. “We found this out the hard way during 2008’s global financial crisis, when it was too slow to set them up. In March 2020, the Fed was faster than usual.

This comes amid tensions that have been building since the collapse of three US lenders a week ago.

Swap lines will be “enhanced the provision of liquidity,” central banks stated. They described the arrangement as “an important liquidity backup to ease strains on global funding markets” that would reduce the impact on the supply and demand for loans for households and businesses.

According to the Fed, daily operations will start on Monday, March 20, and continue until at least the end of April. Monday’s schedule was released by the BOJ for daily operation results release through April 28. Less frequent disclosure will follow in May or June.

Hirofumi Suzuki, chief FX strategist at Sumitomo Mitsui Banking Corp, stated that “Central banks and the authorities were right to swiftly take action before Asian markets opened.” The Fed meeting this week is a key event. Market participants will be closely watching the Fed meeting this week. Analysts are split on how the swap-lines arrangement will impact Wednesday’s Fed announcement.

Larry Meyer, former Fed Governor, is one of those who believe it could make a rate increase less likely. It suggests that there may be greater concern about financial contagion risk. Analysts at Monetary Policy Analytics, which he chairs, acknowledged that the Fed might have some flexibility to “separate” financial easing and monetary tightening after the ECB hike last week.

Vanessa Chan, Fidelity International’s head of Asian fixed income investment directing, believes that this has a more hawkish effect.

“Interest-rate increases are likely to continue as they begin to place various liquidity instruments or liquidity buffers to help stabilize the kind of liquidity situation we’re currently facing in the market,”.

The Fed and US Treasury welcomed the Credit Suisse rescue in a joint statement on Sunday. Janet Yellen, Treasury Secretary, and Jerome Powell, Fed Chair, stressed the strength of US banks’ capital and liquidity.

Banks rushed to borrow money from the Fed last week as they tried to boost liquidity and avoid deposit flight. Under two backstop facilities, lenders borrowed $165 billion. The Fed’s campaign of shrinking its balance sheet was halted by the Fed’s emergency lending.