US dollar swap agreement with the Federal Reserve
The Federal Reserve, Reserve Bank of Australia, Reserve Bank of New Zealand, Bank of Korea, Monetary Authority of Singapore, Danmarks Nationalbank, Norges Bank and Sveriges Riksbank have announced that temporary, mutual currency arrangements (swap facilities) have been established to manage the strained market situation for short-term borrowing in US dollars (USD).
The Riksbank’s swap agreement with the Federal Reserve – what does it involve?
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 is the Riksbank entering into a swap agreement with the Federal Reserve?
It is important that the Riksbank has this opportunity as the banks and their customers need US dollars for their activities. Normally, the banks can borrow dollars directly on the market, but at the moment the markets are not functioning as they should. The Riksbank’s dollar loans will improve access to dollars for the banks and their customers in a situation where the markets are functioning poorly.
Why doesn't the Riksbank enter into swap agreements with more central banks, such as the ECB, to facilitate lending in euros?
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). If necessary, the Riksbank is able to investigate the possibility of a swap agreement with other central banks.