The Federal Reserve has taken a new step to meet the global demand for dollars, setting up a facility that would allow central banks and international monetary authorities to enter into repurchase agreements with the US central bank and trade US Treasuries for dollars.
The Fed said the new facility would work in tandem with the dollar swap lines already established by the central bank with its peers across 14 different countries as the coronavirus pandemic has spread across the world.
In recent weeks the greenback’s value has risen sharply as investors have flocked to safe assets and companies have scrambled to offset the blow to revenues from economic shutdowns.
This has resulted in a global shortage of dollars that has hit emerging markets particularly hard, adding to concerns about the fallout for the global economy.
Volatility in the Treasury market — the world’s largest and most liquid debt market — has further added to investors’ angst, having surged this month to its highest level since the global financial crisis, according to a Bank of America measure implied by options prices.
The temporary facility for foreign and international monetary authorities, or FIMA, will allow foreign central banks and international organisations with accounts at the New York Fed to “temporarily exchange their US Treasury securities held with the Federal Reserve for US dollars, which can then be made available to institutions in their jurisdictions,” the Fed said in a statement.
“This facility should help support the smooth functioning of the US Treasury market by providing an alternative temporary source of US dollars other than sales of securities in the open market,” the US central bank added.
Brad Setser, senior fellow for international economics at the Council on Foreign Relations, said the Fed’s scheme would mostly help countries that already have a significant stockpile of foreign reserves, such as Taiwan, Hong Kong and Thailand — and potentially even India and China — support their financial institutions.
However, it would not be as useful for countries lacking in foreign reserves, such as Turkey, South Africa, Lebanon or Indonesia, which would still have to turn for the IMF to weather the crisis.
Gennadiy Goldberg, a rates strategist at TD Securities, said the Fed move was important because it simultaneously addressed the global scramble for dollars as well as strains that have emerged in the Treasury market.
“It allows foreign central banks to very quickly raise cash instead of exacerbating illiquidity in an already illiquid market,” he said.
Moreover, according to Seema Shah, chief strategist at Principal Global Investors, it should help to improve sentiment among market participants.
“It should take out some of the panic that investors were starting to feel when they saw such a deep and liquid market shut down.”
The move is part of a flurry of actions taken by the Fed to contain the damage from the coronavirus to the US and global economies.
The US central bank has lowered its main interest rate close to zero, announced unlimited purchases of US Treasuries and mortgage-backed securities guaranteed by government agencies, and resurrected a series of facilities dating back to the 2008 financial crisis to support ailing credit markets.
The Fed also has a crucial role in providing loans, loan guarantees and other help to corporate America as part of the $2tn stimulus package recently passed by Congress.
On the international front, the Fed this month established swap lines with the European Central Bank, Bank of Japan, and the Bank of England, and their counterparts in Canada and Switzerland. It then extended those facilities to include other central banks including Mexico, Brazil, Australia and Singapore.
Mr Setser said that even central banks that have established a swap line with the Fed could make use of the new dollar facility as an alternative, depending on their needs.