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Central banks cut dollar offers in sign of market confidence

This month's pullback in demand for dollar swap line programme has helped check rapid expansion of Fed's balance sheet

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Major central banks in Europe and Asia are scaling back their offers of dollars to lenders in a sign of confidence that the pandemic's grip on markets is loosening, even if the economic pain persists.

Frankfurt

MAJOR central banks in Europe and Asia are scaling back their offers of dollars to lenders in a sign of confidence that the pandemic's grip on markets is loosening, even if the economic pain persists.

The European Central Bank, the Bank of England, the Bank of Japan and the Swiss National Bank said they will cut the frequency of their seven-day dollar operations from daily to three times a week starting on July 1. Operations with 84-day maturity will continue to be offered weekly, they said.

The dollar is the mainstay of international trade and central banks ramped up efforts to provide greenbacks at cheap rates when the economic crisis looked like it was morphing into a 2008-style financial meltdown. The Federal Reserve lowered the costs and extended the duration of its existing swap lines with major central banks as part of its easing package in March.

Massive liquidity injections have since helped ease strains, and ECB, BOE and SNB seven-day dollar operations have been almost at zero since mid-May.

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"This shows that the dollar squeeze we observed in March and April is no longer there," said Piet Christiansen, chief strategist at Danske Bank in Copenhagen. "That is also visible in the take-ups of the recent dollar operations, so it's a healthy sign compared to the stress we've seen."

This month's pullback in demand for the dollar swap line programme has also helped check the rapid expansion of the Fed's balance sheet. Assets fell by US$74.2 billion in the week to June 17, the first contraction since February. Nevertheless, the Fed's aggressive asset purchases and liquidity facilities have pushed its balance sheet past US$7 trillion.

Even as market conditions ease, the central banks said they stand ready to readjust the provision of dollar liquidity "as warranted by market conditions". ECB president Christine Lagarde warned European Union leaders on Friday that recent market stability in the eurozone owes almost as much to their proposed 750 billion-euro (S$1.17 billion) recovery fund as to monetary support, and so it is critical that the plan be approved as soon as possible.

In the UK, the BOE cited reduced stress in markets as a reason to slow its bond-buying programme on Thursday - a decision that disappointed investors and raised the prospect that asset prices will be more vulnerable to any shifts in sentiment in the coming weeks.

US jobs data last week showed only a glacial improvement, in a sign that the recovery from the pandemic recession could be drawn out. BLOOMBERG

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