By Isaac Cohen*
It may sound paradoxical but in turbulent times, as today’s, the dollar strengthens. The dollar’s international function, as unit of transaction, reserve currency and as a refuge from volatility, is enhanced in the middle of this time of “extreme uncertainty.”
Beyond the US dollar as one of the currencies in almost 90 percent of all foreign exchange transactions, or the fact that almost 75 percent of all US$100 bills circulate outside the United States, the demand for dollars increases in turbulent times. When the banks and financial intermediaries that provide dollars in normal times refrain from lending, the dollar strengthens.
To alleviate the shortage of dollars and stabilize financial markets, the Federal Reserve performs its function of lender of last resort. This is done through the activation of the existing swap lines with the central banks of Canada. Europe, Japan, Switzerland and the United Kingdom, whereby local currencies are exchanged for US dollars. On March 19, this facility was expanded to nine additional central banks, from Australia, Brazil, Denmark, Korea, Mexico, Norway, New Zealand, Singapore and Sweden. Also, as of March 31, those foreign monetary authorities that have accounts at the Federal Reserve Bank of New York, which includes almost all central banks, were given access to “repurchase (repo) agreements,” enabling the exchange of their US Treasury securities for dollars, agreeing to buy them back at maturity.
These instruments support the stability of global financial markets through the international function of the US dollar.
*International analyst and consultant, former Director ECLAC Washington. Commentator on economic and financial issues for CNN en Español TV and radio, TELEMUNDO and UNVISION and other media.
