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Central banks cut US dollar offers in sign of market confidence

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Major central banks in Europe and Asia will pare back their offers of dollars to lenders in a sign of confidence that market tensions caused by the pandemic are easing even if the economic pain persists.

[LONDON] Major central banks in Europe and Asia will pare back their offers of dollars to lenders in a sign of confidence that market tensions caused by the pandemic are easing even if the economic pain persists.

The European Central Bank (ECB), the Bank of England (BoE), the Bank of Japan and the Swiss National Bank (SNB) said they'll cut the frequency of their seven-day dollar operations from daily to three times a week starting 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 them at cheap rates when the economic crisis looked like morphing into a financial one reminiscent of the 2008 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. European banks took US$130 billion in a subsequent offering in what was then the biggest use of the swap lines since the global financial crisis.

With massive liquidity injections since then, the strains in the global market for dollars have eased. 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 healthy sign compared to the stress we've seen."

Still, the central banks said they stand ready to re-adjust 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 euro zone owes almost as much to their proposed 750 billion-euro (S$1.17 trillion) recovery fund as to monetary support, and so it's 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 coming weeks.

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

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