MNI INSIGHT: Cenbanks Eye Dollar Funding, Have Tools In Place

Major central banks are keeping a close eye on an increase in dollar funding costs, though stresses are still far from levels which might prompt actions such as a reintroduction of the 84-day dollar repo operations abandoned in July 2021, MNI understands.

A more than 20-basis-point rise in the three-month EURUSD basis swap spread on Monday, meaning that it is becoming more expensive to borrow dollars through FX swaps versus doing so domestically, still leaves the spread well below the -200 basis-point levels seen in March 2020, when the Federal Reserve and global peers announced dollar swap facilities.

But the Fed, together with the Bank of Japan, the Bank of England, the European Central Bank and Swiss National Bank, will be monitoring the situation and could also consider whether to extend any swaps to fresh currencies. In contrast to earlier crises, multiple mechanisms are already in place to come to markets’ aid if necessary.

FREQUENCY OF OPERATIONS

Weekly seven-day dollar repos are still offered to help alleviate any stress in funding, after the longer-term operations were shelved as Covid conditions eased, with an option to reinstate. If necessary, central banks could increase the duration and frequency of dollar operations.

Sources told MNI last week(see MNI: ECB Likely To Look Through Any Ukraine Inflation Spike) that the ECB would likely consider a return to three-month operations if conditions in the dollar market deteriorated significantly in the wake of the Ukraine crisis.

The ECB will also have to decide whether to extend existing euro swap facilities for national central banks in central and eastern Europe, an agreement currently due to expire in March.