Gillian Tett: Federal Reserve’s swaps intervention will preserve dollar’s reach
Gillian Tett: Federal Reserve’s swaps intervention will preserve dollar’s reach from GATA
By Gillian Tett
Financial Times, London
Thursday, May 21, 2020
When Jay Powell, U.S. Federal Reserve chair, was grilled in Congress this week, the focus was on how the central bank has helped American companies and consumers during the pandemic. Senators should have also asked — but did not — what the Fed has done recently to help dollar markets outside U.S. shores.
That was a big oversight. When future financial historians study the Covid-19 shock, they will conclude that the Fed’s intervention in offshore dollar markets via swaps deals with other central banks was one of its most significant policy moves. Not only has the Fed’s action calmed markets, it has shored up the hegemony of the dollar-based global financial system for years to come.
To understand all this, some history is required. The concept of central bank swaps, in which two institutions exchange currencies, is not new. Such central bank co-operation had a “sustained pre-history from 1962-1998,” according to a Bank for International Settlements paper. But their use faded in the early 21st century as the Fed focused on onshore dollar markets and the American economy.
That changed abruptly in the 2008 crisis. Historian Adam Tooze notes that policymakers suddenly realised that non-U.S. financial companies, particularly in the eurozone, had built up massive, unbalanced dollar exposures. They owed dollars to investors but were unable to obtain enough of the currency in private markets, sparking panic. …
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