The U.S. Federal Reserve (Fed) has announced a collaboration with other major central banks to ensure a steady flow of the U.S. dollar.
Starting Monday, the Fed will increase the frequency of the dollar swap lines with the European Central Bank, the Bank of Japan, the Bank of England, the Bank of Canada, and the Swiss National Bank from weekly to daily, reports have it.
The move is aimed at steadying exchange rate volatility and easing strains in the supply of credit.
With the dollar swap lines, foreign central banks can borrow U.S. dollars while protecting the Fed from downside risks.
In a swap, a Foreign central bank swaps its currency for an equivalent amount of U.S. dollars from the Fed at the market exchange rate.
After a pre-determined time, the bank returns the dollars it borrowed, with interest, to the Fed.
Importantly, the Fed’s move is meant to reduce the risk of a worldwide dash-for-cash – a situation where investors sell everything, including bitcoin and other cryptocurrencies, and move to cash, predominantly the U.S. dollar.
During financial turmoil, investors typically sell risk assets and park money in cash, preferably the dollar, a dominant reserve currency, in the global financial system. That drives up the cost of acquiring U.S. dollars, leading to stress in the financial system.
The Fed’s move has cleared the way for a rise in risk assets, including bitcoin.
Upon the news, the apex cryptocurrency by market value, which is largely seen as a hedge against the banking system and hit a nine-month high above $28,000.
Bitcoin and risk assets, in general, tend to move in the opposite direction of the dollar.
The last global dash for cash observed during the coronavirus-led crash of March 2020 saw the dollar index surge above 100 and bitcoin nosedive by over 50%.