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(email exchange)

>   On Fri, Dec 19, 2008 at 9:25 AM, Scott wrote:
>   ECB says to discontinue US dollar swap OPS from end Jan.
>   I guess they don’t want euro to strengthen!


This is the new century version of ‘competitive devaluations.’

Paulson moved first by talking foreign CB’s out of buying USD reserves.

Bernanke thought he was helping with rate cuts.

China said ‘no mas’ a while back started ‘letting’ the yuan depreciate, probably via USD purchases.

Japan recently announced ‘no mas’ and that they were prepared to resume USD buying to abort yen appreciation.

If the ECB in fact cuts off its banks ‘cold turkey’ from the Fed’s $ the shock can be enormous.


Upward pressure on USD LIBOR.

Downward pressure on the euro.

Upward pressure on eurozone credit default premiums.

Falling US equities.


ECB to Discontinue Dollar Swap Tenders From the End of January

By Jana Randow

Dec. 19 (Bloomberg) — The European Central Bank said it will discontinue its euro-dollar foreign exchange swap tenders at the end of January due to “limited demand.”

Right! Only $300 billion outstanding.

The ECB will continue to loan banks in Europe as many dollars as they need for terms of 7, 28 and 84 days in exchange for eligible collateral, the Frankfurt-based central bank said in a statement today. Dollar swaps “could be started again in the future, if needed in view of prevailing market circumstances,” the ECB added.

Those circumstances being the strong euro?


12 Responses

  1. All they’re saying is that demand for dollar funding has been satiated for now. They could “start it again in the future” if they need to.

    It’s really up to the Fed, not the ECB. If the Fed says, “That’s it,” then, that’s a different story.

    So far the Fed has not said that.

  2. I think the ECB may be just talking about ending the “swap operations” mode of providing USD liquidity and keeping the “collateralized operations” in place as is now.

    If you look at the history of the ECB auctions, it looks to me like they have (until now) provided a choice between USD Forex “swap” OR “collateralized” auction for Euro financial firms to get USDs on the same days.

    The “swap” type of transactions look like they never caught on, as most of the USD ($100s of billions) have gone the “collateralized” auction route. For instance this week they did a 28-day where the collateralized operation had 47 bidders for $47.5 billion and the swap had one bidder for $70 million. So they are probably not giving up much by ending the “swap” type of operation.

    Link here:

    If this is correct it looks like it is still “game on”.


  3. agreed, the Fed is the source.

    but astounding the ecb has cut off it’s own banks under that thinly disguised pretext. how can they say ‘no demand’ when the outstanding is $300 billion???

    seems to me it’s an all out trade war – whoever inflates the most wins- race to the bottom- competitive devaulations- beggar thy neighbor- merchantalist mentality

  4. If you eat the entire Thanksgiving dinner by yourself there is “no demand” for more food. At least until you digest. That’s all they’re saying.

    Competitive devaluation may be shaping up between China, Japan and the U.S. The Eurozone will be caught in the crossfire and as long as the Fed keeps the spigot open, the euro will rise by default.

    The distortions that will be created in the Eurozone will be huge. It’s the mother of all moral hazards. At some point down the road, when the Fed cuts them off for good the Eurozone implodes and it’ll be too late for them to do anything.

    However, before that happens, it’s a race to the bottom (to use your term) for the dollar, yen and RMB.

  5. Warren, seems like you’re looking at an inflationary trend long term rather than a deepening of the deflationary bias we are now seeing, would that be fair to say? If so, what is your sense on timing?

    Seasonally adjusted CPI is down by 1.7% (1.9% non adjusted), which I am told is the largest drop since 1932. This seems to indicate that a strongly deflationary bias is taking hold, wouldn’t you agree? Don’t you think the fed’s move was at least partially precipitated by these numbers rather than by a race to the bottom for valuation? In other words, it seems to me that the Fed’s scary monster right now is D word, not the I word. Do you think the Fed measures will be strong enough to offset the deflationary trend we see?

  6. Mike, agreed that’s what they are saying. Not sure that’s why they actually are doing it. time will tell!

    tt, yes, i see the inflation (as defined/cpi) returning quickly should fiscal policy be implemented without measures to immediately reduce gasoline/crude oil consumption.

    and even without that it looks to me the saudis will succeed in bringing the price of crude back up even with current levels of demand.

    i agree the fed is worried about deflation, and is doing all they can to stop deflation. problem is they never did have any tools, apart from the international swap lines, but don’t know that.

    that is not to say they were not contributing to deflation by errant policy, like demanding collateral from member banks when they lend. and yes, they have slowly been enacting new policies that have somewhat reduced the negative effects of that policy, though not completely.

    so i suppose you could say the fed’s partial removal of existing deflationary policies is a tool they’ve been using.

    only fiscal policy can add enough to demand to make a difference right now, and it’s already doing it the ugly way via the automatic stabilizers lowering tax revenues and increasing transfer payments due to the slowdown.

    and, as above, a fiscal response sufficient to restore output and employment is also likely to drive up cpi very quickly

  7. Warren,

    On #3 Mike wrote…”Competitive devaluation may be shaping up between China, Japan and the U.S. The Eurozone will be caught in the crossfire and as long as the Fed keeps the spigot open, the euro will rise by default.”

    Do you agree, we may see the euro go higher ( dollar down/euro same) for tachnical reasons untill we stop the swaps , or they stop borrowing $’s in Feb.?

  8. And now russia with today’s ‘devaluation’

    the $/euro could go either way depending on what weapons the cb’s take out of their bag.

    the last move was by the ecb to cut off it’s own $ lines from the fed

    ball in fed court now.

    the fed has the bigger cannon- it can legally buy euros.

    that’s the ‘atomic button’ (incorrectly assigned to ‘quantitative easing’ which is nothing more than interest rate management)

    the ecb can’t buy $, legally.

  9. All of these mercantilist attempts to increase exports bring to mind the scene in “Blazing Saddles” where the sheriff escapes from the angry mob by pointing his own gun to his temple and saying “Nobody move – or the n**ger gets it!”

  10. Warren, on Oct 2 you wrote..
    “It is also becoming more clear that effectively major euro lending institutions have found themselves massively ‘long’ euros and ’short’ dollars. The Fed’s swap lines have grown to over $600 billion, mainly with the ECB. This means the ECB is borrowing USD from the Fed to lend to its banks. This represents the same kind of external debt that has brought down currencies since time began. Running up external debt to sustain your currency is highly unlikely to succeed.

    Ultimately, their only exit is to sell euros and buy the USD needed to cover their net USD needs. The resulting fall in the currency can spiral into a serious run on the banking system. Unlike Americans who run to high quality securities in their local currency when they get scared, Europeans and their institutions tend to flee the currency itself.”

    Seems to me that by abandoning the swap lines the ECB is getting around their inability to “buy dpllars by forcing their institutions to do so by suspending the swaps and forcing their institutions to cover their dollar shorts by borrowing from somewhere else and or sell euro and buy dollars from somewhere in order to cover shorts.

  11. I called the NY Fed about the following Report;
    They specifically told me that the establishment of the swap lines was NOT an FX intervention, so it was not addressed in the subject report….

    “Press Release

    U.S. Monetary Authorities Did Not Intervene in FX Markets during the Third Quarter

    November 13, 2008

    NEW YORK—The U.S. monetary authorities did not intervene in the foreign exchange markets during the July—September quarter, the Federal Reserve Bank of New York said today in its quarterly report to the U.S. Congress.

    During the three months that ended September 30, 2008, the dollar appreciated 11.8 percent against the euro and depreciated 0.1 percent against the yen. In this period, the dollar’s trade-weighted exchange value appreciated 7.3 percent as measured by the Federal Reserve Board’s major currencies index.

    The report was presented by William Dudley, executive vice president of the Federal Reserve Bank of New York and the Federal Open Market Committee’s manager for the System Open Market Account, on behalf of the Treasury and the Federal Reserve System.

    Andrew Williams
    (212) 720-6143

  12. jorge, you got it. the ecb is cutting off it’s band due to what i suspect is move to weaken the euro.

    ball now in the fed’s court.

    matt, correct, they do not classify it as an intervention, and, in fact, it is not a direct intervention into the fx markets. but it sure does influence them!

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