The European Central Bank, Bank of England, and the Swiss Central Bank, will offer unlimited dollar fund auctions with maturities of seven days, 28 days, and 84 days at a fixed interest rate. The Bank of Japan may offer similar measures, the Fed said.
The Fed added that "central banks will continue to work together and are prepared to take whatever measures are necessary to provide sufficient liquidity in short-term funding markets."
Dollar falls on increased currency supply
The dollar fell early Monday against the world's other major currencies on the news, as traders adjusted positions to the increased supply of dollars. The dollar fell one half cent to $1.3615 versus the euro, 1.5 cents to $1.7286 versus the British pound and one-third yen to 100.37 versus Japan's yen.
Economist Richard Felson told BloggingStocks Monday the major central banks' effort is clear: keep financial markets adequately supplied with dollars amid a world that's hoarding dollars.
"It's one of the paradoxes of this current global financial crisis that despite the fact that the crisis originated in the United States, banks and financial institutions around the world are hoarding dollars. The reason is the dollar is still the world's reserve currency and investors are engaging in a flight to safety. The consequence has been a credit crunch," Felson said. "The central banks' policy should help alleviate that crunch by ensuring that there's adequate dollar liquidity. It's the correct move."
The central banks' move follows fiscal policy announcements by the world's major industrialized nations to back bank-to-bank loans and recapitalize banks. Britain said it will invest $73 billion in its banks, Germany is investing as much as $680 billion in loan guarantees, including $70 billion in recapitalization measures, and France will create an agency to offer a state guarantee for banks and to channel money to them, marketwatch.com reported Monday.
"The fiscal actions along with the monetary policy artillery represent two big financial guns," Felson said. "The former will go a long way toward maintaining liquidity, and the latter will help reduce the fear which is the other half of this battle. I can't say the worst of the financial crisis is behind us yet, but these are two big steps in the right direction."
Monetary Policy/Economic Analysis: The central banks' liquidity measure is essential and will help allay concerns that 'the world is running short of dollars.' Meanwhile, the fiscal policy guarantee provisions will also help and they are utilitarian. Keep in mind that under guarantee provisions, few funds will be needed if the system normalizes and typical bank-to-bank lending patterns resume, in which banks expect and receive repayment from banks for loans made. It's time that the United States offered a similar interbank guarantee as the Europe powers have.
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