Wednesday, June 29, 2011

Fed extends dollar swap lines to foreign central banks--AGAIN!

Here's the article.

The Fed is at it again. This is like the fourth or fifth time in the past three years that the Fed has come to the rescue of foreign banking institutions and corporations. By instituting dollar swap lines the Fed provides dollar based liquidity to foreigners who are short dollars and need to make good on their dollar denominated obligations. In return the Fed assumes unlimited risk on this position.

The Fed doesn't have to do this. Central banks of these respective countries and trade zones could provide dollars buy selling their domestic currencies and buying dollars in the foreign exchange markets. But, heaven forbid, that would mean weakening their currencies and making the dollar stronger! So instead of doing that the Fed REMOVES that potentially huge dollar bid. And this comes from Bernanke, who recently talked about wanting a strong dollar??? Unbelievable.

Most shocking, however, is the fact that there is no outcry from Congress or any policymaker that has been complaining about the weakness of the buck. None whatsoever. Where are they?


NeilW said...

Even more ridiculous is the Bank of England accepting those swaps given that the policy of the UK is to try an purchase a 'get out of jail free' card in the export market.

I would have thought they'd have jumped at the chance of weakening Sterling further against the dollar.

Matt Franko said...

You can see these swaps from 2008 in the US ITA Flows in the BEA report at the following link.

Go to page 34, in the 2008 column, Line Item 49 (In the Financial Account: "US Foreign Currency Holdings"). You can see how it spiked by over 500B USD in 2008 after doing nothing the previous 2 years.


Tom Hickey said...

Proof that the US intends a weak dollar to boost exports, so the Fed is supplying liquidity to keep the dollar from being bid up?

Crake said...


I have started reviewing those accounts at BEA. I would like to learn how to follow the flow of import sales going to dollars then X amount of those dollars going to treasuries.

Have you figured out how to follow that flow?

Crake said...

Also on topic:

The Fed may or may not want a low dollar but I think this might have to do with money market default risk rising from the European situation. Creditwritedowns posted this the other day. Could this Fed action be to keep that risk from coming to US via money market funds that invested in French paper?

Matt Franko said...


I'm using these BEA ITA flow reports to try to get a better handle on exactly how these interantional transactions take place..

To answer your specific question here, this is from page 36 of the same report I linked to above:

"Transactions are considered to occur when changes in ownership take place. Transactions are grouped into three accounts. The current account includes transactions in goods, services, income, and unilateral current transfers (gifts). The capital account includes capital transfers, such as debt forgiveness. The
financial account records changes in U.S.-owned assets abroad and foreign-owned assets in the United States.

So changes in the asset allocations of foreign-owned assets in the United States would be documented in the Financial Account section (at the bottom of the chart of accounts on page 34.

A foreign entitiy that originally recived a bank balance in exchange for goods that then moved those bank balances into treasuries would flow like this imo:

Debit (-) foreign owned bank liabilites (Subline 69) and Credit (+) US treasury securities (Subline 65).

You might be able to follow the flows in those 2 line items to see what is going on as balances are moved from bank accounts to treasuries.

Report I linked to above is for a full year but BEA puts it out quartely the latest is here:


excerpt: "U.S. liabilities to foreigners reported by U.S. banks and securities brokers (other than
foreign official assets) increased $363.7 billion in the first quarter, following an increase
of $30.2 billion in the fourth. (Examples of these liabilities are deposits of foreign
residents at banks in the United States and loans by banks abroad to banks in the United States.)
Most of the increase was due to a pickup in liabilities for own accounts."

So the flow that you are looking for (bank balances >>> Treasuries) is not showing up right now... So probably what is happening as the Fed is buying all of the flow of new net issuance of US Treasuries under QE2 ($110B/mo.), the foreigners are just having to "stick it in a bank", as there are no net new Treasuries to buy. Expect this to change when they report 3rd qtr numbers and QE2 will be over by then....


Suggest you read the summary on page 36 of my link at the top, and then stick to analyzing the quarterly reports from BEA as they will provide the most recent data....

Let us know if you see anything interesting!


Anti said...

I thought the point of such swaps was to counter the increasing demand for dollars overseas to maintain the Fed's target rate.

How is this a bad thing? I sure as Hell don't want more disinflation, or worse.

Matt Franko said...


I dont think it is Open Market Operations in support of Monetary Policy, it is separately designated a "Foreign Currency Swap" by the Fed.

I believe they do it to stabilize exchange rates.

Matt Franko said...


The Fed and ECB are central banks and as such they are currency monopolists (Mosler).

Like any good monopolists they are price setters, not price takers.

You could think of it that these two monopolists are colluding to set the USD/Euro price. Which is the price (exchange rate) that they do the swap at...


Anonymous said...

Guessing these "swaps" are just unsecured exchanges of currency with no quarterly payments , and not what we consider swaps at all.

Tape Reader said...

Swaps extended to keep a lid on LIBOR, which many US mortgages reference.

Matt Franko said...


Link to settlement procedures for these operations:



Broll The American said...

Off topic, but I have been noticing this blog features lots of ads about buying gold and other tea-party style ideology. What's up with that?

Crake said...


I think the site gets some revenue from Google ads but has no say in which ads Google runs. I assume that Google places ads based on key words and many of our topics likely have key words that are correlated with target audiences of these gold and etc. ads.

Matt Franko said...

I get pop up ads to send money to Michele Bachmanns PAC! and also a lot from the gold sellers too...

I'm not so sure about this Google ad model ;)

googleheim said...

elastic currency theory

matt or mike - is the reserve swelling or not ?

antipodean centrist said...

All, I'm sorry but you have this one wrong. There is not open ended risk.The ccy risk is zero and the credit risk is to another central bank. It is also not an open ended loan.
It is a currency swap trade. Many thousands of such trades are done every working day between financial organizations. It is the simultaneous sale and purchase of a ccy pair but for different maturities. Example. I buy AUD10 mio and sell USD equivalent both for settlement 1 august, SIMULTANEOUSLY I sell AUD10 mio and buy the USD equivalent both for settlement 1 september [ or any other future date.]
Ergo liquidity provided and there is NO impact on either exchange rate.