The Federal Reserve said Thursday it would set up $450 billion in U.S. dollar swap lines with nine central banks around the world in order to easing funding costs and boost liquidity in economies around the world.
The Fed will offer $60 billion in temporary swap lines to Australia, Brazil, Korea, Mexico, Singapore and Sweden, and $30 billion lines to Norway, Denmark and New Zealand. Similar credit lines are already in place with the Bank of England, the Bank of Japan, the Swiss National Bank and the ECB, the Fed noted.
"These facilities, like those already established between the Federal Reserve and other central banks, are designed to help lessen strains in global U.S. dollar funding markets, thereby mitigating the effects of these strains on the supply of credit to households and businesses, both domestically and abroad," the Fed said in a statement.
The U.S. dollar index, which tracks the greenback against a basket of six global currencies, pared earlier gains after the swap lines were announced, and was marked 0.5% higher on the session at 101.68, a three-year high and a move that extends its 10-day gain to around 6%.
With the Fed offering trillions in daily repo operations and liquidity support, and central banks around the world slashing rates and proving backstops for their respective economies, unprecedented amounts of cash and commitments are currently in place in a global economy that is now certain to slump into recession before the end of the year.
However, investors are still not only unsure as to how and when the ever-expanding coronavirus -- which has now infected more people in Europe than in China -- will slow, allowing for normal activity to resume in the world's biggest economies. Nor are they able to predict the scale of the damage to earnings, growth and in some cases the actual survival of companies that once sat as bellwethers in portfolios around the world.
That's lead to a wholesale dumping of assets such as gold, oil and copper and Treasury and corporate bonds, with most of the proceeds finding their way back into the U.S. dollar, which has risen to multi-year highs against its global peers and push other currencies, particularly the pound, to multi-decade lows.
"The reality is that we just don’t know how long these Covid-19 lockdowns are going to last and we can’t really expect fiscal stimulus plans by the government to completely fill the hole of economies grinding to a standstill," said ING's Chris Turner. "It is very hard to know when this dash for dollar cash ends."
"We do make the controversial point that Washington could start to talk about FX intervention to weaken the dollar – or at least address the disorderly moves seen," he added.