Central Bank Swap Lines Enhance Financial Stability, Support Standing of US dollar As Dominant Global Currency

Federal Reserve (Fed) Governor Christopher Waller has opined that US dollar may face some challenges to its dominance in the future while the policymakers are also attuned to the potential financial stability challenges that the current broad use of the US dollar can pose for financial systems in the United States and the rest of the world. He noted that past experiences show that foreign shocks can transmit to the United States when investors and governments seek a safe haven to protect the value of their assets in periods of stress. Such a “flight to the dollar” means that dollars are in especially high demand in funding markets around the globe during these episodes, as we saw during the Global Financial Crisis and the financial turmoil at the outset of the COVID-19 pandemic.

Waller stated that the Federal Reserve supports the use of dollars internationally through its liquidity facilities, including the central bank liquidity swap lines, which provide foreign central banks with the capacity to deliver US dollar funding to institutions in their jurisdictions. This evidence suggests that the central bank swap lines not only ensure that credit continues to flow to US households and businesses, but also that these swap lines have effects that enhance financial stability and, thus, the standing of the US dollar as the dominant global currency.

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First Published: May 21 2024 | 11:56 AM IST