Following the collapse of the SVB earlier this month, the U.S. Federal Reserve released an announcement on Sunday, saying that they have joined hands with other major central banks in order to ensure a steady flow of the U.S. dollar, which is arguably a dominant reserve currency, into the global financial system.
Read On: USDC Dollar Depeg
The announcement is hoping to calm the worries that is rattling the global banking sector in recent times. Starting today, March 20, 2023, the Fed had said that they would be increasing the frequency of the dollar swap lines with several of the world banks. The activity will now be processed daily instead of weekly. The banks in discussion includes the following:
- The European Central Bank
- The Bank of Japan
- The Bank of England
- The Bank of Canada
- The Swiss National Bank
In a joint statement, the Central banks said, “To improve the swap lines’ effectiveness in providing US dollar funding, the central banks currently offering US dollar operations have agreed to increase the frequency of 7-day maturity operations from weekly to daily.“
This move by the Fed is aimed at calming the exchange rate volatility along with avoiding the blockage in the supply of credit to households and businesses worldwide. The decision comes after the previous week’s incident of blowups of three banks in the U.S. and also the takeover of Credit Suisse, the troubled Swiss-lender by UBS and Swiss National Bank.
This announcement, more importantly, reduces the risk of a worldwide phenomenon of investors selling their assets, including bitcoin and other crypto tokens, and moving to cash, which has a possibility to be predominantly the U.S. dollar. To dive deeper, during times like these, when the global markets are somewhat in a turmoil, the typical behaviour of the investors’ is to sell risk assets and park that money in cash, which is preferably the dollar.
In doing so, it drives up the cost of acquiring the U.S. dollars, which leads up to the stress in the financial system.
To simply explain it, the increased frequency of swap lines, which has now become a possibility, has cleared the way for an unabated rise in risk assets, that includes Bitcoin as well.
As the leading crypto asset is seen as a hedge against the banking system, according to a CoinDesk data, Bitcoin saw a nine-month high value of about $28,000 late Sunday, and its cumulative month-to-date gains nearly hit 25%!
The statement from the Fed also said, “The network of swap lines among these central banks is a set of available standing facilities and serve as an important liquidity backstop to ease strains in global funding markets, thereby helping to mitigate the effects of such strains on the supply of credit to households and businesses.“
