The United States Federal Reserve (Fed) announced on Sunday that it had joined forces with other major central banks to ensure a steady flow of the US dollar, the world’s dominant reserve currency, in the global financial system.
Beginning Monday, the Fed will increase the frequency of its dollar swap lines with the European Central Bank, the Bank of Japan, the Bank of England, the Bank of Canada, and the Swiss National Bank from weekly to daily. Dollar swap lines allow foreign central banks to borrow dollars in the United States while protecting the Fed from downside risks. A swap is a transaction in which a foreign central bank exchanges its own currency for an equivalent amount of US dollars from the Fed at the market exchange rate. At a set period of time, the bank repays the Fed with interest the dollars it borrowed.
The move is intended to reduce currency volatility and avoid strains in the supply of credit to households and businesses worldwide. It follows the failures of three US banks and the takeover of troubled Swiss lender Credit Suisse by UBS and Swiss National Bank.
It demonstrates policymakers’ increased concern about financial stability and calls into question the Fed’s ability to continue raising interest rates. Since March 2022, the central bank has raised borrowing costs by 450 basis points, roiling asset markets, including cryptocurrencies, last year.
More importantly, the Fed’s support for global dollar liquidity reduces the risk of a global rush for cash, in which investors sell everything, including bitcoin and other cryptocurrencies, and move to cash, primarily the US dollar. During times of turmoil, investors typically sell risk assets and invest in cash, preferably the US dollar. This raises the cost of acquiring US dollars, causing financial system stress.
In other words, the increased frequency of swap lines has paved the way for an unstoppable rise in risk assets such as bitcoin. The leading cryptocurrency by market capitalization is widely regarded as a hedge against the banking system, and it hit a nine-month high above $28,000 late Sunday, bringing the month-to-date gains to nearly 25%, according to CoinDesk data.
In the past, the dollar swap lines have been bearish for the currency. Bitcoin and risk assets in general move in the opposite direction of the US dollar. During the latest global cash rush, which occurred during the coronavirus-caused crash in March 2020, the dollar index rose beyond 100 and bitcoin fell by more than 50%.
