The dollar tumbled sharply against all major counterparts after an announcement by major central banks around the world that they have agreed on a coordinated move to increase liquidity in the global financial system by lowering the price on existing dollar swaps.
Basically the central banks are acting to strengthen the existing swap lines that allow them to provide dollars to their domestic banks in an effort to ease financial market tension. Under the new arrangements, the Federal Reserve has lowered the cost of the swap lines. The arrangements have also been extended until 2013.
“The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity,” the U.S. Federal Reserve said in a statement.
The central banks that made the agreement were from developed nations and included the US Federal Reserve, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank. These banks agreed to lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements by 50 basis points.
The pricing will be applied to all operations conducted from Dec. 5. The authorization of these swap arrangements has been extended to Feb. 1, 2013. The new pricing takes the new rate down to the U.S. dollar overnight index swap, or OIS, rate plus 50 basis points.
The central banks have also agreed to establish temporary bilateral liquidity swap arrangements so that liquidity can be provided in each jurisdiction in any of their currencies should market conditions so warrant, the Fed said.
The euro surged 1.5 percent against the dollar within minutes of the announcement to hit a session high of 1.3504 from 1.3298.