According to Brazil's Central Bank President, Henrique Meirelles, the extension of a US Federal Reserve currency swap line to Brazil shows confidence in South America's largest economy.
The Federal Reserve extended on Tuesday, February 3, a line of credit with 13 central banks, including Brazil and Mexico in Latinamerica to October 30. The credit line was set to expire on April 30.
"The extension of the currency swap lines with the US central bank, to the amount of 30 billion US dollars, shows confidence in the fundamentals of the Brazilian economy at the same time that it increases the ability of the central bank to provide liquidity to the foreign exchange market," Meirelles said through the bank's media department.
Brazil's central bank has sold dollars on the spot foreign exchange market on a nearly daily basis to avert a massive plunge in the country's currency and meet demand for greenbacks. The bank has also sold foreign exchange swaps and dollar repurchase agreements.
The Brazilian currency Real weakened nearly 33% since reaching a nine-year high in early August just before the crisis became global.
The Fed said it extended the currency swap lines because of "continuing substantial strains in many financial markets."
Actually the Fed decision applies to five emergency-lending programs that provide funds or Treasury securities to securities brokers, money-market funds and companies that issue commercial paper, along with swap lines with 13 other central banks.
The move basically signals the Fed sees credit markets in the US and around the world taking longer to repair than previously thought. The lending programs are authorized under a provision allowing loans to non- banks under "unusual and exigent circumstances." Outstanding loans and swaps under the programs totaled US$ 884 billion as of January 28.
More specifically the extended currency-swap programs applies to the central banks of Australia, Brazil, Canada, Denmark, UK, the Euro zone, South Korea, Mexico, New Zealand, Norway, Singapore, Sweden and Switzerland. The Bank of Japan will consider an extension when its policy makers next convene, the Fed said.
The dollar value of outstanding swaps has risen more than sevenfold since the Lehman Brothers Holdings Inc. bankruptcy in September to US$ 465.7 billion as of January 28.
However the cost of borrowing in dollars rose this week to the highest level in more than three weeks as banks continued to balk at making loans. The London inter-bank offered rate, or Libor that banks say they charge each other for three-month loans, climbed to 1.23% from 1.08% on January 14, the British Bankers' Association said.
Last week, the Fed reported for the first time the amount of currency swaps with other central banks after previously listing them as "other assets" on its balance sheet. The swaps had risen by 2.88 billion to 465.7 billion USD over the previous week, it said.