1. Is this swap contraction premediated, and is the Fed essentially forcing foreign Central Banks to sell dollars into the open market, thus driving the dollar persistently lower. A comparison of the DXY with the total outstanding in CB swaps indicates that there, if nothing else, a strong correlation between the two.
2. What will happen with the foreign Central Banks end up needing the US' swap backstop again? Even if the dollar devaluation is not an ulterior motive but merely a side-effect of this balance sheet contraction, the next time half a trillion in CB swaps is pumped into the system, one can only imagine the consequences for the dollar. If half a trillion taken out is what it took to majorly whack the dollar (and to make commodities and stocks more attractive to foreigners), then the inverse should have a diametrically opposite effect. Of course, the Fed is pricing to perfection as usual, and keeping its fingers crossed it will never need to loosen up its CB swap lines again. That always works as a strategy, until it doesn't. And if recent feedback from Europe is any indication, the next strategy for Bernanke is the old ostrich head in the sand routine.Sphere: Related Content Print this post