Thursday, October 30, 2008

Dollar Swaps

Earlier this month, the Fed established $600B of swap lines with European banks, where the local currency could be exchanged for dollars. Yesterday, the Fed announced similar swap lines with Brazil, Mexico, Korea, and Singapore, at $30B each.

I understand that dollars are in scarce supply which causes problems with foreign banks paying their debt to U.S. banks. In essence, the swaps would appear to be an indirect way to further replenish the capital base of U.S. banks (by giving dollars to foreign banks who owe U.S. banks money), while the Fed ends up holding on to up to $700B in various foreign currences that could easily continue their decline.

I have a suspicion this is where all the newly minted currency since September is going.

No comments: