The Fed, ECB and others are taking coordinated steps to increase dollar liquidity; Bitcoin tops $28K

The US central bank (Fed) announced on Sunday that it had joined with other major central banks to ensure a steady flow of the US dollar, a dominant reserve currency, in the global financial system.

The Fed said it would increase the frequency of its dollar swap lines with the European Central Bank, the Bank of Japan, the Bank of England, the Bank of Canada and the Swiss National Bank from weekly to daily, starting Monday. The dollar swap lines allow foreign central banks to borrow US dollars while protecting the Fed from downside risk. In a swap, a foreign central bank exchanges its own currency for an equivalent amount of US dollars from the Fed at the market rate. After a predetermined time, the bank returns the dollars it has borrowed, with interest, to the Fed.

The measure is aimed at mitigating exchange rate volatility and avoiding strain on the credit supply to households and businesses worldwide. It comes on the heels of the collapse of three US banks and the takeover of troubled Swiss lender Credit Suisse by UBS and the Swiss National Bank.

It shows heightened concerns about financial stability among policymakers and calls into question the Fed’s ability to keep raising interest rates. The central bank has lifted the cost of borrowing by 450 basis points since March 2022, a surging asset market, including cryptocurrencies, last year.

More importantly, the Fed’s plugging back of global dollar liquidity reduces the risk of a worldwide dash-for-cash – investors selling everything, including bitcoin and other cryptocurrencies, and moving to cash, mainly US dollars. During turmoil, investors typically sell risky assets and park money in cash, preferably dollars. It increases the cost of obtaining US dollars, leading to stress in the financial system.

In other words, the increased frequency of swap lines has cleared the way for unabated growth in risky assets, including bitcoin. The leading cryptocurrency by market capitalization, widely seen as a hedge against the banking system, hit a nine-month high above $28,000 late Sunday, taking its cumulative monthly gains to nearly 25%, CoinDesk data shows.

The dollar exchange lines have been bearish for the dollar in the past. Bitcoin and risk assets generally tend to move in the opposite direction to the dollar.

The last global streak for cash seen during the coronavirus-led crash in March 2020 saw the dollar index rise above 100 and bitcoin fall by over 50%.