The dollar cements its position
The Fed will exchange treasury bonds for overnight dollar loans. This is positive
The pre-eminence of the United States (US) dollar has been underlined with a thick green line during the present pandemic. The dollar has surged against all currencies since the crisis began. Which is why there was a collective sigh of relief among central banks everywhere when the US Federal Reserve announced on Tuesday that it would exchange US Treasury bonds for overnight dollar loans.
The facility was also extended to the Reserve Bank of India (RBI), though it is yet to take advantage of the offer. It carried out a $2 billion swap recently, and with oil prices having crashed, it has no urgent need for dollars. Like most major economies, the bulk of India’s international financial transactions are dollar-denominated. If its external position unravels further, India’s central bank may yet need a dollar infusion. With the recently announced swap arrangement, RBI can use its roughly $160 billion holdings of US Treasury bonds, about a third of the country’s foreign exchange reserves, to match any dollar requirements. The bank’s decision to greatly increase its dollar holding over the past several years has proved prescient.
While there has been much talk about the rise of the Chinese renminbi, about 90% of international transactions are denominated in dollars. The sudden surge in dollar demand caused by the pandemic put many central banks in a tight spot, including that of China. The Fed’s decision immediately eased pressure on the dollar as it meant the trillions of dollars of US Treasuries held by other central banks were effectively as good as cash dollars. Dollars represent 60% of global foreign exchange reserves. The US central bank, in a simple and responsible action, has served to remind that there is still only one central bank of central banks.