How the Fed’s Swap Lines Aim at Dollar Funding Stress

A global run on the U.S. dollar triggered by the coronavirus pandemic is once again prompting the Federal Reserve to step in as the lender of last resort for investors and companies scrambling for dollars. The Fed enhanced the existing dollar-liquidity swaps it offers foreign central banks and established new ones as part of sweeping emergency measures unleashed to ease a shortage of greenbacks. The idea is to help companies seeking to either raise cash or repay loans and alleviate pressure on currency markets.

First used extensively during the 2007-2008 financial crisis, they’re temporary lending facilities that allow central banks around the world to borrow dollars from the Fed in exchange for an equivalent amount of their local currencies. On March 15, the Fed and five major central banks, including those in the euro zone and Japan, said they’d activate the program to ease a squeeze as demand for the dollar surged. They subsequently increased the frequency of seven-day maturity operations to daily from weekly. The Fed also lowered the rate and added a longer maturity. Then it expanded the swap line to nine other central banks, including Australia and Brazil, bringing the total to 14. And then at the end of March it allowed foreign central banks to swap any Treasuries securities they hold for cash.