The US Federal Reserve (Fed) announced on Sunday that it has joined forces with other major central banks to ensure a steady flow of the US dollar, a dominant reserve currency, in the global financial system.
The Fed said it will increase the frequency of dollar swap lines with the European Central Bank, Bank of Japan, Bank of England, Bank of Canada and Swiss National Bank from weekly to daily starting Monday. The dollar swap lines allow foreign central banks to borrow US dollars while protecting the Fed from downside risks. In a swap, a foreign central bank exchanges its own currency for an equivalent amount of US dollars from the Fed at the market exchange rate. After a predetermined time, the bank returns the borrowed dollars to the Fed with interest.
The move is aimed at calming exchange rate volatility and avoiding strains in the credit supply to households and businesses worldwide. It follows the explosion of three banks in the US and the takeover of ailing Swiss lender Credit Suisse by UBS and the Swiss National Bank.
It shows heightened financial stability concerns among policymakers and questions the Fed’s ability to continue raising interest rates. The central bank has hiked borrowing costs by 450 basis points since March 2022, sending asset markets, including cryptocurrencies, into turmoil over the past year.
More importantly, the Fed’s safeguarding of global dollar liquidity reduces the risk of a global dash-for-cash – investors are selling everything, including bitcoin and other cryptocurrencies, and switching to cash, primarily the US dollar. During turmoil, investors typically sell risky assets and park cash, preferably dollars. This drives up the cost of acquiring US dollars, causing stress in the financial system.
In other words, the increasing frequency of swap lines has paved the way for an unabated rise in risky assets, including Bitcoin. Widely viewed as a hedge against the banking system, the leading cryptocurrency by market value hit a nine-month high above $28,000 late Sunday, taking cumulative month-to-date gains nearly 25%, CoinDesk data shows.
Dollar swap lines have historically been bearish for the dollar. Bitcoin and risky assets in general tend to move in the opposite direction of the dollar.
The latest global cash rush seen during the coronavirus-induced crash in March 2020 saw the Dollar Index surge above 100 and Bitcoin plummeting over 50%.