WASHINGTON — The Federal Reserve said it would extend currency swap lines to nine additional countries, an attempt to keep dollars flowing to banks around the world as the coronavirus disrupts every aspect of business, creating a cash crunch in many nations.
The Fed opened currency swap lines with central banks in Singapore, South Korea, Brazil, Sweden, Australia, New Zealand, Mexico, Norway and Denmark, it said Thursday morning.
The Fed has a history of creating swap lines to help foreign central banks deliver U.S. dollar funding to financial institutions in their regions amid market stress. Such agreements were used extensively during the 2008 financial crisis. Indeed, the new arrangements are with the same countries the Fed struck such agreements with during that crisis.
The Fed’s move came as companies and banks scramble for dollars, contributing to disorder in a global financial system that has been thrown into turmoil by the coronavirus. Investors everywhere are trying to turn their asset holdings into cash as quarantines close restaurants, stop factory lines and upend seemingly every facet of modern capitalism — threatening vast economic damage.
Friday’s step is the latest move by the central bank to try and restore calm to the markets and ensure that credit continues to flow. The Fed has slashed interest rates to near-zero to help cushion the economy, is buying massive quantities of bonds and has spent this week unveiling emergency lending programs.
Late on Wednesday night, the Fed said it would offer emergency loans to money market mutual funds, the vehicles that millions of Americans use to save money that can be readily tapped. Their total value is about $3.8 trillion, according to the latest data from the Investment Company Institute.
That move was aimed at trying to prevent a recurrence of the events that happened in September 2008, when a major money market fund suffered huge losses on short-term Lehman Brothers debt and “broke the buck,” meaning its value fell below the customary $1 per share.
The Fed is pulling out all the stops to keep the inner workings of the financial system operating smoothly, because short-term economic pain could turn into long-term suffering if credit crunches prevent companies from getting the cash they need to continue operating. Should businesses close, temporary disruptions caused by coronavirus quarantines could turn into long-lasting job losses. That, in turn, could result in broader economic damage as homeowners miss car and mortgage payments.
Keeping dollars flowing abroad is part of that equation.
The Fed has standing swap lines with partners including the Bank of Canada, the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss National Bank, and it sweetened the terms on those programs on March 15 to encourage their use.
“Because of the importance of the U.S. dollar in the global economy, strains in the markets for borrowing and lending dollars overseas can disrupt financial conditions here in the United States,” Jerome H. Powell, the Fed chair, said in a news conference after that decision.
Swaps work through two transactions: A foreign central bank first sells its currency to the Fed in exchange for dollars. The foreign central bank is then obligated to buy back its currency on a specified date at the same exchange rate, with interest.
The dollar is in many ways the world’s currency. Banks overseas have some $13 trillion in dollar-denominated assets. Because banks abroad operate so heavily in dollars, they may need access to dollar-based credit to weather a shock.
The new swap lines will support dollar provision of between $30 billion and $60 billion, depending on the nation, and will last for at least six months, the Fed said.
“These facilities, like those already established between the Federal Reserve and other central banks, are designed to help lessen strains in global U.S. dollar funding markets,” the Fed’s Thursday release said of its new agreements.