The American currency is in high demand, prone to dangerous appreciation

AMERICA’S CURRENCY was not always as coveted as it is in today’s troubled times. In the 1960s European central banks had more dollars than they felt comfortable holding. To discourage them from converting their greenbacks into gold, the Federal Reserve introduced its first “swap line” in 1962, allowing foreign central banks to obtain dollars in exchange for their own currency, then swap them back at a later date. Combined with the Fed’s purchases of dollars, the swaps helped protect nervous foreign central banks from the dangers of a dollar devaluation.

The world now faces the opposite problem: a dollar in high demand, prone to dangerous appreciation. It has, unsurprisingly, strengthened against the currencies of emerging markets, which have suffered brutal capital outflows since late January (see chart). But the dollar has, more surprisingly, also strengthened against safe-haven currencies such as the yen and the Swiss franc, and pushed currencies like the pound and the Norwegian krone to their weakest level in decades. On March 18th Bloomberg’s dollar spot index, which measures the greenback against a basket of currencies, hit an all-time high, its seventh consecutive rise. Anyone seeking to swap their yen, francs or euros for dollars (and then swap them back again after a few months) must pay a premium, known as the cross-currency...

via The Economist: Finance and economics Business Feeds

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