FAQ about loans in US dollars
The Federal Reserve, the Reserve Bank of Australia, the Reserve Bank of New Zealand, the Bank of Korea, the Monetary Authority of Singapore, Danmarks Nationalbank, Norges Bank and Sveriges Riksbank established temporary, mutual currency arrangements (swap facilities) to manage the strained market situation for short-term borrowing in US dollars during the corona pandemic.
What does it mean that the Riksbank is entering into a swap agreement with the Federal Reserve?
A currency swap involves two parties (in this case, the Riksbank and the Federal Reserve), who exchange their respective currencies (in this case SEK and USD) with one another during a period of time, and then exchange them back again for a cost expressed as interest. A swap agreement gives the Riksbank access to this type of currency exchange. This means that the Riksbank could, if necessary, lend a larger volume of US dollars to its counterparties than would otherwise be possible. Without a swap agreement, the volume the Riksbank can lend is limited to what is available in the foreign currency reserve.
Why did the Riksbank enter into a swap agreement with the Federal Reserve?
It was important that the Riksbank had this opportunity as the banks and their customers need US dollars for their activities. The Riksbank’s dollar loans improved access to dollars for the banks and their customers in a situation where the markets were functioning poorly.
Why is the dollar such an important currency in stressed situations in financial markets?
The US dollar is an important currency for global trade, and a large share of financial assets, such as equity and other securities are denominated in USD. This is one reason why a shortage of dollars arises during times of turbulence and stress (as in the financial crisis of 2008).