Fed. Dollar-Swap Rule Extended

By grobb[at]marketwatch[dot]com (Greg Robb), MarketWatch

WASHINGTON (MarketWatch) — The Federal Reserve, the European Central Bank and other key central banks announced Wednesday they have extended existing dollar-lending arrangements for another year.

Under the swaps program, the Fed swaps dollars for euros, yen, pounds, Swiss francs or Canadian dollars to give five foreign central banks access to U.S. dollars demanded by banks in their countries.

At maturity, the dollars will be returned, with interest.

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Bernanke on Greece
The Fed did take the Greek situation into account in while drafting the most recent outlook, and that while the current climate is not ideal, it does not suggest that the Fed needs to start another round of asset purchases. Courtesy Fox News. (Photo: Getty.)
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James Bullard, the president of the St. Louis Fed, said in an interview with the Wall Street Journal that the Federal Open Market Committee voted to extend the programs at its meeting last week.

Bullard said the program may be useful if the debt crisis in Europe were to spin out of control.

“Europe’s sovereign-debt crisis remains very much alive,” Bullard said.

The programs were first put in place after the bankruptcy of Wall Street icon Lehman Brothers in September 2008, when the London interbank offered rate, or Libor, spiked.

The Fed had closed the programs after the crisis eased but opened them again last May when the European Union and the International Monetary Fund announced a safety net fund to contain the Greek debt crisis.

The agreements had been scheduled to expire Aug. 1. The new swap arrangements have been authorized through August 1, 2012.

The Bank of Japan will vote on the extension at its next meeting.

In a separate statement, the ECB said it will continue to conduct U.S. dollar liquidity-providing operations with a maturity of seven days.

The central bank said it will keep the necessity, frequency and maturity of its U.S. dollar repo operations under review.