- In March, the Federal Reserve temporarily expanded its dollar swap lines and created the Foreign and International Monetary Authorities (FIMA) repo facility. In this post, we explain what these policies are and why they are important. In a follow-up post, we will show evidence that these policies have been largely effective.
- Dollar swap lines1 allow foreign central banks to swap their own currency for an equivalent (market-based) amount of U.S. dollars from the Fed. After some pre-determined time, the bank returns the dollars it borrowed—plus some interest—and gets back the currency it gave the Fed.2 These swaps allow central banks to borrow U.S. dollars while insulating the Fed from downside risks.3
- In times of turmoil, demand for the U.S. dollar tends to rise because it is seen as a safe asset. This demand rapidly increases the value of dollars relative to foreign currencies while making it difficult for foreign and international markets—where the dollar is often used—to function, increasing financial risks across the world. This demand can also impact the flow of credit to U.S. households and businesses, since it becomes more difficult or expensive to acquire U.S. dollars.
- By making it easier for central banks to access U.S. dollars, these swaps and FIMA repos increase the supply of dollars in foreign markets, calming exchange rate volatility and allowing markets and credit lines to operate smoothly.