Fed extends liquidity facilities, forex swaps

By Mark Felsenthal

WASHINGTON (Reuters) - The Federal Reserve on Tuesday extended, by six months, programs designed to funnel billions of U.S. dollars to markets worldwide and keep money flowing in a banking system shattered by the worst financial crisis since the Great Depression.

"Continuing substantial strains in many financial markets" made the actions necessary, the Fed said as it announced that it was extending through October 30 "swap lines" that provide U.S. dollars to 13 central banks. It said the Bank of Japan would consider a similar extension at its next policy meeting.

In addition to prolonging the currency swap lines that were due to expire on April 30, the U.S. central bank said it would extend through October 30 a host of other programs providing liquidity to the U.S. commercial paper and money markets, and to large Wall Street firms.

Acting as a lender of last resort, the Fed launched a myriad of programs over the past 13 months to try to keep credit flowing through a financial system devastated by mounting losses on mortgage-related assets.

The Fed's latest moves were widely anticipated as actions by the U.S. and other central banks have met with limited success so far in reviving financial institutions hit hard by mortgage-related losses and the global economic downturn.

"The Fed is saying it's doing everything to support financial markets," said Harm Bandholz, an economist for UniCredit Research in New York. "To let any measure expire would be counterproductive."

The currency swaps provide foreign central banks with dollars from the Fed to lend to banks in their jurisdictions to ease dollar funding conditions. The swap facilities with the Bank of England, the European Central Bank and the Swiss National Bank have are for "quantities sufficient to meet demand" -- in other words, no upper limit.

Other central banks said on Tuesday the swaps will continue to be helpful at a time of turmoil.

Canada said it does not plan to draw on the swap facility but said maintaining the agreement is "prudent." Brazilian Central Bank President Henrique Meirelles said the swap line shows confidence in the fundamentals of the Brazilian economy.

Dollar borrowing costs are well above normal levels even though they are lower than at the height of financial turmoil last fall around the time of the collapse of investment bank Lehman Brothers, said David Kotok, chairman of Cumberland Advisors in Vineland, New Jersey.

"The swap lines accomplish dollar liquidity outside the United States in banking systems which were very tight with respect to dollars," said David Kotok of Cumberland Advisors in Vineland, New Jersey.

(Editing by Chizu Nomiyama)