New York Fed Conducts First Test of Euro Swap Line

The Federal Reserve Bank of New York said it conducted its first test of a euro swap line with the European Central Bank during the fourth quarter.

“On Oct. 21, the Federal Reserve Bank of New York performed the first non-U.S. dollar liquidity swap small value exercise, in which the Federal Reserve drew euros from the euro liquidity swap line with the ECB,” it said in a quarterly report on foreign exchange interventions released Thursday.

The bank also “performed a small-value U.S. dollar liquidity swap exercise with some foreign central banks” on Dec. 4 to “test the operational readiness of the swap arrangements.”

The Fed and U.S. Treasury didn’t intervene in foreign exchange markets during the quarter, the report said.

The swap-line test is probably an exercise in risk management, said Sebastien Galy, a senior currency strategist at Societe Generale SA in New York.

“The potential for destabilizing portfolio flows is very important,” Galy said. “The fact that they actually test these tools, which are theoretically completely irrelevant, just tells you that the portfolio channel as part of a broad threat analysis has increased significantly over the last few months.”

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