It was recently announced that the Fed planned to re-open lines with other central banks, allowing them to swap for dollars. We’ve been down this path before. I want to review what happened last time, because if that pattern repeats, we are about to begin a brand-new stage of financial system stress and stock market losses.
To begin, you should review this article I wrote on September 25, 2009, which describes currency swaps and does a post-mortem on the relationship between dollar swap volumes and strength in the US dollar index. The correlation was pretty tight.
Here’s the primary image from that article with some of the text that followed it:
Here we might note that the startling run of dollar strength that caught so many investors off guard (but not Goldman Sachs or JP Morgan, it should be noted) began just in front the steep, half-trillion US dollar currency swap operation that began in earnest in fall of 2008.
Note also that the double top in the USD and its subsequent slide all line up nicely with the swaps additions and withdrawals. Correlation is not causation, but this is a pretty cozy relationship, and it possibly explains one of the more unusual periods of dollar strengthening in recent history.
Speaking of cozy relationships, the one between the NY Federal Reserve and big Wall Street institutions stands out, as do the outsized trading returns that quite conveniently repaired more than a few large firms during this same period of time.
by cmartenson 
