Fed Using Currency Swaps to Boost the U.S. Dollar

Market Oracle ^ | 4/17/09

[FromLori]

Currency swaps are of reciprocal currency agreements (swap facilities) between central banks. The officially purpose of such agreements are explicitly of short term and are intended to finance short-term capital flows believed to be seasonal or temporary in nature. Swap agreements are also misused to facilitate large interventions in foreign exchange markets, which is what is occurring with the dollar today.

How currency swaps work

The easiest way to understand currency swaps is to think of them as two separate zero-interest loans. For example, let’s say the fed and the ECB arrange a 80 billion euros ($107 billion) swap. The ECB then lends the 80 billion euros to the US, and the US loans $107 billion dollars to the ECB. Later, at an agreed date, the currency swap is reversed: the ECB returns the $107 billion dollars to the fed, and the fed pays back 80 billion euros.

How central banks use currency swaps

Central banks use the foreign currency from swap agreements to prop up their domestic currency by:

A) Providing the foreign currency to domestic financial institutions. (If those institutions were forced to go to the exchange markets for funding, it would drive down the value of the domestic currency.) B) Using the foreign currency to directly intervene in exchange markets.

[smokingfrog]

Considering that the fed is planning 15-fold increase in us monetary base, 300 billion in foreign debt could quickly turn into 3 trillion or more.

[CanaGuy]

I’ll see your dollar, and raise you two CDN$.

[wombtotomb]

Is this bad? Please excuse the ignorance. I barely have enough at the end of the week to buy food, much less invest, so I don’t really follow it closely.....

[Sundog]

Buy some extra beans and rice. Don’t go hungry. It’s what I’ve bought.

[wombtotomb]

been doing that for a while now. Thanks for the laymans explanation.....

[bruinbirdman]

"Is this bad? Please excuse the ignorance. I barely have enough at the end of the week to buy food, much less invest, so I don’t really follow it closely....."

Let's say the ChiComs have $1.9T in foreign currency reserves (cash, bonds, etc.). Suppose the ChiComs have been hinting that they are dissatisfied with exchange value futures. And, perhaps, the ChiCom Czar says he is thinking about backing a world currency.

Maybe the European Central Bank, US Treasury (Federal Reserve), and the Bank of Japan will have something to say about that.

yitbos

[wombtotomb]

what would they say?

[lakey]

This is a keeper. Thanks!

[gondramB]

>>Considering that the fed is planning 15-fold increase in us monetary base, 300 billion in foreign debt could quickly turn into 3 trillion or more.<<

Where have you seen plans to increase the monetary base like that?

[snowsislander]

There's a link in the article that's definitely worth following:

http://www.ustreas.gov/offices/international-affairs/esf/history/

[FromLori]

Thanks for pointing that out.

[smokingfrog]

http://www.freerepublic.com/focus/news/2210841/posts

Glenn Beck: The Inconvenient Debt: A Detailed Look at the Latest Monetary Base Figures

"Such a large increase in the monetary base cannot be left in place indefinitely without creating quite sizable inflation pressures," Richmond Federal Reserve President Jeffrey Lacker told an audience of local business leaders in Charleston.

[autumnraine]

Yeah, I have no idea if this is a good or bad thing.

It sounds bad, but I don’t know.

[autumnraine]

Damn, really????

I have plenty of food for several years, hopefully it’s enough.

[org.whodat]

And just think the federal govermnmet has put people in jail for misstating their financial statements.

[bruinbirdman]

"what would they say?"

What is the subject of this article?

yitbos

[Toddsterpatriot]

The true danger of currency swap agreements is that they allow irresponsible central banks to temporarily prop up their currencies by racking up large amounts of foreign debt.

This would seem to apply to both central banks. Why isn't it a wash? Where is his proof that the Fed is using the foreign currency to prop up the dollar?

When the swap agreements are later unwound, not only does the domestic currency’s value fall,

Again, both sides are unwound, why isn't it a wash?

but the nation is left with large amounts of foreign denominated debt.

Debt, what debt is left after the swaps are unwound?

Through the treasury’s Exchange Stabilization Fund and the Federal Reserve's System Open Market Account, the United States has twice used swap agreements in failed attempts to prop up the dollar.

Twice? Wow!

Given the US’s repeated abuse of currency swaps,

Repeated? You mean both times? LOL!