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Fed acts to give liquidity boost to swap market

AMERICA’S Federal Reserve has moved to shore up liquidity in the international money markets by reopening currency swap facilities with the world’s major central banks, echoing steps it took to ease market concerns after the failure of Lehman Brothers.

The Fed said it would provide dollar swaps for the European Central Bank, the Bank of England and the Swiss National Bank with no upper limit against fixed collateral, running until January 2011.

The Bank of England said in a statement: “These facilities are designed to help improve liquidity conditions in the US dollar funding markets and to prevent the spread of strains to other markets and financial centres.

“Central banks will continue to work together closely as needed to tackle pressures in funding markets.”

The move came after the three-month dollar Libor rate – the rate at which banks lend to each other – on Friday rose at its sharpest rate in 16 months. It fell yesterday from 0.428 per cent to 0.421 per cent. The Fed took similar steps in late 2007, after the collapse of Lehman Brothers.