This morning's Bloomberg Brief offers commentary regarding the recent stress within dollar funding markets, and specifically assesses its impact on the global financial system. Joseph Brusulelas [astutely] mentions the fact that approximately $200mm in cash has been drawn from the Federal Reserve's dollar liquidity swaps facility (during the week ending 8/18), a source last tapped in October of 2010. Although this figure is minuscule relative to the ~$9bn drawn at the onset of the European debt crisis, it may be a harbinger of difficult conditions ahead. Perhaps more significantly, the one-year basis swap (3M Euribor less 3M USD Libor) declined to open at approximately -50bps, indicative of the fact that the USD is in greater demand (and therefore yields a premium to hold). Overnight lending rates have also increased; notably, according to Bloomberg, Credit Suisse has increased the premium it charges for overnight lending by "an unusually large 8.5bps," suggesting rising counterparty risk. It will be interesting to follow the interbank and swap rates in the days and weeks to come.
Some historical context: in 2010, the FOMC provided dollar liquidity swap lines with the ECB and SNB to, as one would expect, "provide liquidity in US dollars to overseas markets." Foreign currency swap lines have been in place from April 2009 through February 2011 (in partnership with BOE, ECB, BOJ and SNB, "in sterling in amounts of up to £30 billion, in euro in amounts of up to €80 billion, in yen in amounts of up to ¥10 trillion, and in Swiss francs in amounts of up to CHF 40 billion"), but the Fed did not draw on these lines.
Today's FT Alphaville presents the argument that the institution of a new FX swap facility would be "a much more useful move than any form of QE," but notes that such lines "are not a permanent solution."
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