The US dollar dominance morphed the U.S. financial crisis of 2007-8 into the “Global Financial Crisis,” GFC. The resultant ‘flight to safety’ led to a rapid $ appreciation and to a liquidity crunch, inducing a fast moving and deep global recession. Concerns about the GFC provoking the Great Depression of the early 21st Century, induced the FED to act as the $ lender of last resort, extending unprecedented selective Bilateral Swap Lines (BSLs). The FED policies during the GFC and its aftermath have supported the international role of the dollar, and the safe haven status of U.S. Treasuries. Crisis containment efforts included enhancing the FED’s role in reducing $ funding shortages in systemic financial centers by extending BSLs and Repo agreements between CBs. The selectivity of BSLs during the GFC indicates that countries with significant trade, financial and geopolitical linkages can expect access to ad hoc swap arrangements on a case by case basis. The Covid-19 crisis became another test of the robustness of the dollar dominance at times when the U.S., EU and China have converged to a similar global GDP share of about 20%, PPP adjusted. Facing acute strains in the offshore dollar funding markets during the COVID-19 crisis, the Fed provided US dollar liquidity to the global economy by reactivating or enhancing swap arrangements with other central banks; and establishing a new repo facility, FIMA, for financial institutions and monetary authorities. The FIMA Repo Facility allows FIMA central banks and other international monetary authorities with accounts at the New York FED to enter into repurchase agreements with the FED. Approved FIMA account holders may temporarily exchange their U.S. Treasury securities held with the FED for U.S. dollars, that can then be made available to institutions in their jurisdictions. This facility provides, at a backstop rate, an alternative temporary source of U.S. dollars for foreign official holders of Treasury securities other than the sales of securities in the open market. Studying the impact of these facilities suggests that access to Fed liquidity was driven by close financial and trade ties with the US. An economy’s share in US trade and a military alliance with the US are positive factors associated with access to a Fed swap agreement. An economy with high levels of banking and financial exposure to US, and stronger trade ties with the US tended to have greater access to Fed liquidity, via swap lines or FIMA. Economies with a large share of global trade, regardless of whether they are major trading partners of the US, also had greater access to US dollar liquidity via the Fed. Economies that faced appreciation pressures against the US dollar and whose local currency exchange rate became more volatile were more likely to auction greater amounts of US dollars in their domestic market. Swap-related announcements led to the appreciation of currencies against the US dollar and reduced these currencies’ deviations from CIP. Dollar auctions by major central banks (BoE, ECB, BoJ and SNB) generated spillovers: they led to a temporary appreciation of other currencies against the US dollar, to reduced CIP deviations, and to persistently reduced sovereign bond yields of other economies. However, dollar auctions done by non-major central banks with access to Fed facilities did not have a meaningful impact on key domestic financial variables. The impact of major central bank auctions was similar for economies with different financial and trade links with the US, and for economies with different balance sheet currency and foreign debt exposures. Consequently, the major central bank auctions benefitted even the more vulnerable economies. The above results confirm the ‘Narrow circle, broad effect’ of US FED swap lines during the GFC and the Covid-19 crisis. We close the overview by reviewing open questions regarding the future robustness of the US dollar dominance, and the functioning of the global financial system in times of perils
