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The US Federal Reserve set new currency swap lines worth $30 billion with central banks in Scandinavia and Australia on Wednesday to boost short-term US dollar liquidity and help drive down interbank lending rates. European money markets rates eased on Wednesday after the Fed's move, but analysts questioned if the pledged $30 billion in new liquidity was enough to calm markets for long.
The Fed's action comes on top of $247 billion that has already been committed to currency swaps with other major central banks, as authorities battle a global credit crunch sparked by the collapse of the US subprime mortgage market last year.
"These facilities, like those already in place with other central banks, are designed to improve liquidity conditions in global financial markets," the Fed said. "Central banks continue to work together during this period of market stress and are prepared to take further steps as the need arises," it said in a statement.
The Fed said it had established temporary reciprocal currency swap lines of up to $10 billion each with the Reserve Bank of Australia and Sweden's Riksbank, and $5 billion swaps with Denmark's Nationalbank and Norway's Norges Bank. The Fed said the swaps were specifically aimed at addressing elevated pressures in US dollar short-term funding markets.
"It feels like there's a continued lack of dollars in European time," Olav Gunnes, head of Norwegian interest rate trading at Norway's biggest bank DnB NOR, told Reuters. "Nobody is certain if this is enough but every additional dollar helps." Overnight rates for US dollars in Europe surged to more than 10 percent last week during the worst of the financial turmoil following the Lehman Brothers collapse.
On Wednesday, dollar overnight rates in London fell to 2.6875 percent from 2.95 percent on Tuesday - but were still well above the Fed's 2 percent target rate. Norway's has been the busiest among Scandinavian central banks, injecting both crowns and US dollar currency swaps since Lehman's collapse to calm the local money market, which stopped functioning at one point last week.
One-day crown rates fell to 6.25 percent at Wednesday's daily fixing from 6.91 percent on Tuesday but remained well above the central bank's 5.75 percent target. Michael Grahn, an analyst at Danske Markets in Stockholm, said the Fed measure appeared to be more of a "framework for future action" rather than anything "up and running right now".

Copyright Reuters, 2008

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