Fed, Five Central Banks Cut Dollar Swap Rate
Six central banks led by the Federal Reserve lowered the cost of emergency dollar funding for financial companies in a global effort to ease Europe’s sovereign-debt crisis.
The new interest rate is the dollar overnight index swap rate plus 50 basis points, a half percentage-point cut, and the program was extended by six months to Feb. 1, 2013, the Fed said today in a statement in Washington. The Fed coordinated the move with the European Central Bank as well as the Bank of Canada, Bank of England, Bank of Japan, and Swiss National Bank. (SNBN)
U.S. and European stocks rallied on the move aimed at easing strains in markets and boosting central banks’ capacity to support the global financial system. The cost for European banks to fund in dollars rose to the highest levels in three years today as concerns about a possible breakup of the euro area increased after leaders said they’d failed to boost the region’s bailout fund as much as planned.
“It’s a step in the right direction,” said Jay Bryson, global economist with Wells Fargo Securities in Charlotte, North Carolina. “It doesn’t solve the problem in Europe, but to the extent that European banks are having trouble raising dollar funding, it makes it easier and less costly for these banks to borrow dollars.”
The six central banks also agreed to create temporary bilateral swap programs so funding can be provided in any of the currencies “should market conditions so warrant.” Those swap lines were also authorized through Feb. 1, 2013.