The dollar is in high demand. Its scarcity could be explained by its global role
was not always as coveted as it is in today’s troubled times. In the 1960s European central banks had more dollars than they felt comfortable holding. To discourage them from converting their greenbacks into gold, the Federal Reserve introduced its first “swap line” in 1962, allowing foreign central banks to obtain dollars in exchange for their own currency, then swap them back at a later date.
One reason for this scarcity may be the dollar’s global role. Zoltan Pozsar and James Sweeney of Credit Suisse, a bank, have pointed out that supply chains are payment chains in reverse. When the flow of parts, components and assembly is interrupted, so is the flow of payments in the other direction. In East Asia, where the pandemic began, these payments are often made in dollars.
The banks themselves can turn to the Fed, which can lend them dollars they cannot obtain on their own. But the Fed is less able to help banks that lack a presence in America. Last year non-American banks had $13trn-worth of dollar liabilities, according to calculations by Iñaki Aldasoro and Torsten Ehlers of the Bank for International Settlements. Only 22% of this total was booked with branches or subsidiaries in America. The rest was out of the Fed’s immediate reach.
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