The Offshore Dollar and US Policy

Dollar borrowing outside the United States has over generations grown to be very large, with US policy providing some inducement and, in critical episodes, support. But in lending dollars through open-ended central bank swaps in 2008 and 2020, the Fed broke new ground as international lender of last resort. By countering dollar runs on non-US banks, the Fed supplied the global public good of financial stability. In addition, it restored domestic US monetary transmission. In 2020 the Fed's last-resort buying of domestic corporate bonds also did double duty, stabilizing the global dollar bond market. Although the Fed has swap lines with relatively few central banks, their banks and currency markets consistently dominate offshore dollar borrowing. Lending through central bank swaps thus enables the Fed to backstop global dollar funding markets at times of severe strain. Questions abound regarding moral hazard, the new benchmark dollar rate, bond-market crisis management, and feasible scale.