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Swap Lines Underscore the Dollar's Central Role
First Quarter 2012
Featured in the first quarter 2012 issue of EconSouth, "Swap Lines Underscore the Dollar's Global Role" discusses the important role of U.S. currencies in global finance and explains how central bank swaps helped ease dollar shortages abroad. The article was authored by Galina Alexeenko and Sandra Kollen, both of the Atlanta Fed's research department, and staff writer Charles Davidson.
The swap lines, also called reciprocal currency arrangements, highlight the interconnectedness of the global financial system and the U.S. dollar's integral role as a global currency, the authors write. Indeed, much of the world's financial and economic activities are conducted in U.S. currency. However, access to dollars has been severely impaired at times, most recently in late 2011 due to the European debt crisis. As a result, offshore banks found it increasingly difficult to borrow dollars. "This situation is significant because one of the major business lines of European banks is providing financing in dollars on a global scale," the article notes.
In this and other instances, the Federal Reserve established temporary swap lines with several foreign central banks, consistent with its mandate to "provide liquidity to the financial system."Doing so helps cushion the U.S. economy from the effects of financial instability, the authors explained.
The relatively straightforward process involved the Fed swapping U.S. dollars for foreign currency for a set time period. The foreign central banks then lend those dollars to financial institutions in their jurisdiction. At the end of the swap period, the foreign central banks return the dollars to the Fed in exchange for their local currency.
"Global availability of U.S. dollars is important not only for international financial institutions, but for U.S. businesses, governments, and consumers that rely on international trade and credit supply," the authors conclude. Therefore, "the swap lines support both the international role of the dollar and safeguard the U.S. economy from financial turmoil abroad."
To learn more about temporary currency swap lines and their use in past crises, be sure to read the full article in the first quarter issue EconSouth, now available in print and online.