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WASHINGTON, Oct 29 (Reuters) - The Federal Reserve on Wednesday extended U.S. dollar liquidity aid beyond traditional markets, opening four new $30 billion currency swap lines with Brazil, Mexico, South Korea and Singapore.
The temporary arrangements, authorized through April 30, 2009, are aimed at easing global U.S. dollar funding shortages, the Fed said.
“These facilities, like those already established with other central banks, are designed to help improve liquidity conditions in global financial markets and to mitigate the spread of difficulties in obtaining U.S. dollar funding in fundamentally sound and well-managed economies,” the Fed said in a statement released in Washington.
The decision comes a day after the Fed established a $15 billion swap line with the Reserve Bank of New Zealand. The U.S. central bank now has 13 swap lines with foreign central banks.
It also coincides with the International Monetary Fund’s decision to launch a short-term financing fund to help emerging market economies weather the global credit crisis.
The Fed has expanded its reciprocal currency agreements with foreign central banks in recent weeks to ensure they have a steady stream of short-term U.S. dollar funding as financial institutions in their markets unwind dollar-based assets. Global credit markets froze up in late September after the failure of investment bank Lehman Brothers, limiting private sources of dollar funding.
The Fed in mid-October lifted all limits on swaps with the European Central Bank, the Bank of England, the Bank of Japan and the Swiss National Bank. It also is maintaining swap lines with the central banks of Canada, Norway, Australia, Sweden and New Zealand.
In separate statements, the foreign central banks said the swap lines would be used to meet U.S. dollar funding needs of their financial institutions and help ease pressures from international financial turmoil.
The Banco Central do Brasil said Brazil’s National Monetary Council would set conditions on institutions’ use of the swap line.
“This agreement is part of the central bank’s strategy to combat the effects of the international financial turbulence on the Brazilian economy,” the bank said in a statement, adding that such arrangements highlighted the “importance of central bank cooperation at the current juncture.”
The Bank of Korea said in statement that Brazil, Mexico, Korea and Singapore accounted for 6.0 percent of the world economy in 2007 and together had foreign currency reserves of nearly $700 billion.
South Korea has said its foreign-currency reserves of nearly $240 billion, ranking sixth in the world, were sufficient to avert a repeat of the 1997-1998 financial crisis. But it is struggling to halt a huge slide in the won KRW=, which has lost one-third of its value, hit by lingering doubts about the ability of the country's banks to service their maturing short-term debt.
The swap deal with the Fed came hours before the country’s parliament, controlled by the conservative Grand National Party, was set to vote on the government’s pledge to guarantee up to $100 billion in foreign debt that local commercial banks will borrow until mid-2009.
“The U.S. dollar swap facility will enhance the robustness of the Asian dollar market for U.S. dollar funding and the foreign exchange markets in Singapore,” the Monetary Authority of Singapore said. “These markets are a significant part of the global financial system, and international financial institutions rely on Singapore as the largest U.S. dollar and foreign exchange center in Asia outside of Japan.”
The Singapore authority said there was sufficient liquidity in the Singapore dollar market to meet the needs of its banking system and it “will continue to inject additional liquidity as necessary to ensure this.”
The Fed also said it welcomed the International Monetary Fund’s decision to establish a short-term liquidity facility for emerging-market countries, adding it was supporting the IMF’s role in helping countries address and resolve their ongoing economic and financial difficulties. (Additional reporting by Yoo Choonsik in Seoul and Todd Benson in Sao Paulo; Editing by Leslie Adler)
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