ECB and BOE Continue to Provide Dollar Liquidity

The dollar has been sold off today and ECB and BOE have added fuel to the fire. They continue to provide dollars to their member banks, who then appear to turn around and sell them.

While longer dated dollar repos have largely stopped, the ECB and BOE continue with their one week operations. The SNB had a dollar auction as well, but no bids were turned in.

We have argued that among the most successful Fed liquidity facilities were the swap lines offered to a number of foreign central banks. At its peak the Fed provided foreign central banks close to $600 bln. As of last week, these swap lines were less than $30 bln.

Recall the sequence of events, during the acute part of the crisis, rather than a surplus of dollars, there was actually a shortage. In the minutes of the Nov FOMC meeting, the Fed suggested that the dollar's recent decline was the unwinding of safe haven flows. We have argued that while there was some safe haven activity, primarily Americans repatriating funds, the real source of demand for dollars was to fund dollar assets of foreign institutions, especially European banks.

Clearly the dollar shortage problem has been alleviated. Yet officials insist on continuing to make dollars available. It is true that the rate 1.11% annualized seems high compared to one week LIBOR (fixed 21.6 bp--range of BBA contributors 17 bp to 25 bp) it turns out to be 2 bp a week equity--or about 30 ticks on the euro (at $1.50).

Although the Fed's low interest rates and ample provisions of liquidity are understood as the source of the main pressure on the dollar, other officials are providing dollar liquidity as well. To the extent that the BOE and ECB continue to provide dollar liquidity, they cannot be too concerned about the extent of the dollar's losses.

Some pundits may begin talking about being on "intervention watch" with these recent dollar losses, don't buy it. If the ECB and/or the BOE were sufficiently concerned, stopping providing dollars would be the first line.