1. mander said...

Uncontrolled money creation backed by securitization caused opportunities to dry out to quick. Politicians are doing everything to stabilize the money creation and securitization process but where to invest now?

3. devo said...

“The Federal Reserve will also be working with its central bank counterparties to close its temporary liquidity swap arrangements by February 1.”

Following the Fed’s statement this week, there was a coordinated release of comments from the European Central Bank, the Bank of England and the Swiss National Bank confirming that the swap lines were no longer needed.

For the currency markets, this is a big deal. Yet, few have thought the juicy details of the Fed’s plans on currency swaps are of interest.

But I do. I suspected it was a game changer for the dollar when I was studying the statement last December. And so far, the price action in the currency markets is confirming that.

Here’s a bit of background …

In September and October of 2008, the Fed announced that it would be opening temporary currency swap lines with central banks around the world in fixed amounts through April of 2009. As that expiry date neared, the Fed extended the period to October, and then extended it again until February of this year.

Here’s what that means: The Fed agreed to give foreign central banks U.S. dollars at a determined exchange rate for the currency of the respective foreign counterpart. And when the swap ends, the two central banks simply repay the same quantity of currency back. There’s no exchange rate risk and no impact on the demand for currency in the open market.

Why Did the Fed Offer Dollars to the Rest of the World?

When the credit crisis was at its peak, banks around the world were hesitant to do any short-term lending with other banks. As a result foreign bank-to-bank lending rates for dollars, the world’s primary business currency, shot up. That restricted access to dollar borrowing and pushed a lot of consumer interest rates higher in the U.S. and abroad.

By providing these currency swaps with other central banks, the Fed helped to inject dollar liquidity into banks around the world. And it was well needed.

In short, it was good for the global financial system because it helped reduce the fear premium that was causing market interest rates to soar.

Most importantly for currencies, what these currency swaps did was increase the supply of U.S. dollars in the global markets — a negative drag on the value of the dollar.

So with the Fed announcing that it will close its currency swap lines with foreign central banks by February 1, the unlimited access to dollars by foreign central banks has come to an end.

This development is easily a positive for the dollar.

http://www.moneyandmarkets.com/feds-currency-swap-lines-a-big-deal-for-the-dollar-37555

5. This comment has been removed as it was found to be in breach of our Blog Policies.

7. tpbeta said...

Drewster - there's contrarian and there's nuts.
But I agree. Hopefully the carry pop will come before the summer and then back into sterling or maybe gold will be cheap by then. Who knows.

9. mark wadsworth said...

He's quite possibly right, but don't forget that the carry trade with yen went on for seven years or so, the yen fell and fell for seven years, and then in late 2008 it popped right back to where it had been seven or eight years previously.

i.e. you can make money doing this (and I did, thank you very much) but be prepared for the long haul.