The U.S. Federal Reserve is leading an unprecedented effort by major central banks to push dollars into the global financial system, the Fed announced Monday, backstopping government fiscal policies to restore confidence,

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."

A debate on 'How much money does the Fed have?' is premature, several economists told BloggingStocks Monday.

Instead Fed policymakers, in conjunction with the U.S. Treasury, and major central banks in industrialized economies, should and will focus on the huge task at hand: using traditional and new tools to stabilize the financial system. Investors/traders should concentrate on that, as well, the economists say.

'Fight the fire, now; worry about water costs, later'

"Questions regarding the ultimate size of the Fed's resources are not appropriate at this juncture, in my view," Economist David H. Wang said. "The immediate task is to prevent a panic, a panic that could cause this financial crisis to turn into a financial calamity."

"The Fed, ECB [European Central Bank], Bank of England, Bank of Japan, and others must fight the fire that's pretty big right now, and determine the water costs later," Wang added. "They have to maintain liquidity and create new tools and mechanisms that keep overnight credit available to banks, companies and institutions, Otherwise commerce is going to slow down like a car with an oil leak."

Economist Richard Felson agreed with Wang, adding that the Fed and or the U.S Treasury have to make sure corporations and other key institutions - - including state governments - - have adequate overnight and related short-term capital. "They have to prevent the financial crisis from choking off credit to sound companies and of course to the states. The crisis can not be allowed to prevent companies from conducting typical business or states from paying suppliers, making payroll, rolling over debt etc. or the economy will contract further," Felson said. "We've got to stop the momentum and get the ball rolling in the other direction."

With passage of the rescue bill, and the U.S. Treasury's upcoming actions to stabilize credit markets through a variety of tools/mechanisms, one area that is likely to experience negative consequences is the dollar.

Simply, more dollars borrowed (or more dollars printed) almost always means each dollar is worth less. Economist Richard Felson said a gradual, orderly decline in the dollar "would be expected, and is almost considered the default response, given increased U.S. government borrowing." The dollar closed Friday down about one-half cent to $1.3775 and $1.7713 versus the euro and the British pound, respectively.

Central banks monitoring dollar's level

However, leaders of the world's major industrialized economies will not, in Felson's interpretation, accept a sudden and/or inordinate decline in the dollar. "Along with increased stress on the financial system, 'brutal' currency movements, as [European Central Bank President Jean-Claude] Trichet has said, throws everything out of whack by making it hard for companies to project costs of foreign operations," Felson said. "For these reason and others I believe the major central banks will intervene to support the dollar, should the U.S. Treasury's extra borrowing or the U.S. Federal Reserve's extra lending for the bailout lead to too large or too quick of a decline in the dollar."

The U.S Federal Reserve and its companion, major central banks around the world again Monday took actions to keep financial markets liquid amid a credit crunch that has made private banks reluctant to lend critical, short-term funds to each other, and that threatens to slow global growth to a crawl.

The Fed said it increased the size of its dollar swap arrangements to $620 billion from the previously-announced $290 billion. The Fed also increased the size of its liquidity auctions and announced two forward auctions to provide funding over the year-end period.

"These steps are being undertaken to mitigate pressures evident in the term funding markets in the United States and abroad," the Fed said.

"By committing to provide a very large quantity of term funding, the Fed actions should reassure financial market participants that financing will be available against good collateral, lessening concerns about funding and rollover risk," the Fed said.

The nine banks participating in the swap lines are: the European Central Bank, Bank of England, Bank of Japan, Bank of Canada, National Bank of Denmark, Bank of Norway, Reserve Bank of Australia, Bank of Sweden, and the Swiss National Bank.

Economist backs Fed's moves

Economist Richard Felson applauded the Fed's move, given "the unchartered waters the Fed is in, and the political pressure it faces."

"It's liquidity front-and-center, while simultaneously determining with the [U.S.] Treasury which institutions have to be saved, which it can let the private sector dissolve, and at the same time begin the process of buying distressed debt," Felson said. "One goal is lowering the LIBOR spread, and this should help."

Libor-OIS rose 219 basis points Monday, Felson said, "a clear sign banks remain reluctant to lend to each other."

The U.S. Federal Reserve and the major central banks around the world took action again Tuesday to keep the financial markets liquid, amid a credit crunch that threatens to slow global growth to a crawl.

The Fed added $50 billion in liquidity to the financial markets through overnight repurchase agreements. In addition, the European Central Bank, the Bank of England, and the Bank of Japan each announced previously unscheduled actions to add liquidity to the financial markets, Marketwatch.com reported Tuesday.

The Fed's action came after overnight rates soared 333 basis points to 6.44%, as private banks pulled back credit and became reluctant lend to one another.

Economist Peter Dawson told BloggingStocks Tuesday the aim of the world's major central banks is clear: maintain market liquidity to enable transactions between solvent parties.

"The Fed and other central banks may have drawn a line in the sand regarding not saving insolvent institutions, but their stance regarding functioning banks is clear: they're going to prevent solvent institutions from freezing up for lack of liquidity," Dawson said. "The private banks may not choose to use that liquidity, due to a reluctance to conduct business, but the funds will be there."

The dollar's modest rally faded Tuesday afternoon as traders calculated that the U.S. Federal Reserve is likely to continue to cut key, short-term interest rates by another 50 basis points to jump-start the anemic U.S. economy.

In mid-day Tuesday trading, the dollar was substantially lower against the world's other major currencies. The dollar fell almost 2 cents to $1.5596 versus the euro, about one-half yen to 100.22 versus Japan's yen, and about 1.5 cents to $2.0003 versus the British pound. The dollar also fell about 1 cent to $1.0095 versus the Swiss franc.

Short-lived dollar rally

Some traders had argued that the dollar would be able to post its second straight weekly rise on renewed confidence that the U.S. economy would perform better than expected, with a shallow recession, said Andrew Resnick, independent currency trader. But those comments most likely will be categorized as 'famous last words' based on recent U.S. housing data, which suggests continued U.S. economic sluggishness up ahead, he said.

The dollar fell to a yet another record-low against the euro Friday and plunged against the world's other major currencies, as investors shunned U.S. investments ahead of an almost-certain U.S. recession, with likely further interest rate reductions from the U.S. Federal Reserve.

Friday's trigger event for selling was The Bear Stearns Companies, Inc. (NYSE: BSC) stunning announcement that -- less than 10 days after senior management officials called liquidity-crunch rumors 'absolutely ridiculous' -- it had accepted a 28-day, emergency, secured loan from the U.S. Federal Reserve via JP Morgan Chase & Co. (NYSE: JPM).

The Fed said in a statement that it will ``continue to provide liquidity as necessary to promote the orderly functioning of the financial system,'' repeating reassurances Federal Reserve Chairman Ben Bernanke has made often since credit problems first surfaced in August 2007. The Fed did not state how large their loan is to Bear Stearns.

The dollar plunged to a two-year low versus Japan's yen Tuesday, and retreated against other major currencies, on fears the U.S. economy has fallen into a recession, Bloomberg News reported.

The dollar fell 1.26 yen to 106.90 versus the yen. Meanwhile, the British pound rose about 1.5 cents to $1.9704 in mid-day Tuesday trading. The dollar was virtually unchanged versus the euro at $1.4862.

Economists and analysts say a recession in the United States would invariably drive the dollar lower, due to foreign investors' reduced demand for dollar-denominated U.S assets, many of which would underperform during a recession. The dollar also would be hurt by lower interest rates, a near-certainty in the months ahead, with the U.S. Federal Reserve widely expected to again cut benchmark, short-term interest rates to jump start the U.S. economy.

The dollar must be feeling a little like the late stand-up comedian Rodney Dangerfield, because recently, the dollar "just isn't getting any respect."

The dollar fell to a record low against the euro Tuesday morning, moving to $1.4556 before trading around $1.4545 on talk that the U.S. Federal Reserve is likely to lower interest rates further in an effort to stimulate the U.S. economy and counteract the economic drag effect of subprime mortgage losses. If the Fed cuts rates at its next meeting in December, it would be the third rate cut in four months.

Against the British pound, the dollar moved to $2.0897, a 26-year low, before retreating to trade around $2.0875 in Tuesday mid-morning trading. The dollar also fell to 92.59 cents against the Canadian dollar, but traded slightly higher against Japan's yen, rising to 114.75 yen from 114.55 yen earlier in the day.