Resolved Question
What is dollar swap?
bloomberg mentioned "dollar swap" when they were talking about the bailout by the ECB, what is it actually? and what is this "dollar swap" has to do with the current bailout by central banks?
about 1 year ago
Best Answer - Chosen by Asker
With a dollar swap, the ecb gives the fed euros in exchange for dollars. Like forex ninja mentioned, this would enable the ecb to inject us dollars back in the markets. Why would it need to do so? Well, recently, the debt problems in the euro zone have caused investors to cut back on risk and buy up the safe-haven us dollar instead. Such high demand for the us dollar has caused some markets, particularly in europe, to run out of greenbacks! This could give rise to liquidity problems in the near term, which is why the fed and other central banks decided to engage in dollar swaps. In fact, this situation is similar to the time when risk aversion caused liquidity to "dry up" in the markets after the lehman brothers collapse way back in 2008. This gave rise to a credit crisis wherein individuals and companies had to face higher borrowing costs. Maybe central banks are careful not to let this happen again.
about 1 year ago
Answers (1)
As the term suggests, it's basically exchange us dollars for euros. What has it got to do with the current euro zone debt crisis? Well, the recipient bank of the dollar swap agreement would liquidity to the domestic money markets by injecting all the dollars they received. In a time like this, the demand for dollars sharply rose as investors dump euros due to fears the sovereign debt crisis in Greece could escalate.
about 1 year ago
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