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Fed gives central banks wider access to US dollars with repo agreement

Washington

THE US Federal Reserve on Tuesday broadened the ability of dozens of foreign central banks to access US dollars during the coronavirus crisis by allowing them to exchange their holdings of US Treasury securities for overnight dollar loans.

The new programme "should help support the smooth functioning of the US Treasury market by providing an alternative temporary source of US dollars other than sales of securities in the open market," the US central bank said.

This in effect gives central banks with less widely traded currencies or more volatile exchange rates a way to access cash from the Fed.

That could be particularly important in coming weeks as measures to control the spread of the virus shuts down commerce and potentially leaves companies and countries that do business or borrow in the US currency struggling to stay afloat.

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The dollar is used in most global trade and foreign exchange transactions, and finance officials in major nations have pledged to be flexible in responding to the global pandemic.

The dollar pared its gains after the announcement, while short-end Treasury yields held steady and the US stock market opened lower.

The programme is expected to be running by April 6 and last for at least six months.

The Fed has permanent swap lines with the European Central Bank, the Bank of Japan and other issuers of major currencies, and in response to the crisis opened swaps with nine other countries including Australia and Mexico. In those transactions, foreign currencies are traded directly for dollars in what is regarded as a relatively risk-free transaction.

By contrast, the currencies issued by many of the world's central banks are often narrowly traded and volatile, posing the risk they might change dramatically in value during the swap.

Many of those central banks have accounts at the New York Fed, part of the global architecture for payments and clearing transactions. They often also hold US Treasury securities.

The new programme lets them use those securities as collateral for dollar loans at an interest rate of 0.25 per cent. While ostensibly the loans are just for a day, they can be "rolled over as needed", the Fed said.

"By allowing central banks to use their securities to raise dollars quickly and efficiently, the facility will also support local markets in US dollars and bolster broader market confidence," the Fed said.

"Stabilising foreign dollar markets, in turn, will support foreign economic conditions and thereby benefit the US economy through many channels, including confidence and trade."

The facility was authorised by the Federal Open Market Committee, according to the statement.

Outstanding transaction totals will be made public in the Fed's weekly balance sheet report.

"What we often see in a crisis is that there is a shortage of dollars globally," Julia Coronado, founding partner of MacroPolicy Perspectives in New York, said in an interview on Bloomberg Radio. "This is what the Fed is trying to address. It's trying to short circuit what is clearly going to be deep and painful recession from becoming a full-blown financial crisis."

Central banks can "obtain cash instead of selling their Treasuries outright," said Gennadiy Goldberg, a strategist at TD Securities. "This should take some pressure off dealer balance sheets, and prevent foreign central banks from selling their Treasuries in large sizes, which can destabilise the market." REUTERS, BLOOMBERG

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