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Now that we all know the economy here is shrinking, it might come as some consolation to know the greenback is still going strong.
Trouble is, everybody’s hoarding dollars.
So countries that need them to do business are coming up short.
In response, the Federal Reserve opened up dollar denominated credit lines for a handful of key economies — Mexico, Brazil, South Korea and Singapore.
Marketplace’s Jeremy Hobson reports.
This may sound like a bailout but currency experts say it’s as good for us as it is for the countries involved.
They make up about 10 percent of U.S. trade.
The raw materials in the products we buy from them are often sold in dollars.
So if dollars are unavailable, commerce comes to a halt, which causes all kinds of problems.
As they ran around and tried to scramble to get dollar credit, their currencies depreciated massively. So, it was disrupting international business harmful both to them and to us.
Michael Mussa is a senior fellow at the Peterson Institute for International Economics.
He says there’s another plus for the U.S., which benefits when other countries use dollars to conduct business.
We are by far the world’s largest borrower. And one of the reasons why we’re able to borrow on reasonably cheap terms is because the dollar has this dominant role in international finance.
The plan is not without risk.
It depends on the four countries ability to swap the dollars back in April.
Johs Worsoe heads up global markets with Union Bank of California.
He says if those countries currencies depreciate further, that will be more difficult.
I mean, there’s a risk to everything we’re doing right now, and those risks are being weighed at the Fed. And they believe the alternative scenario poses a greater risk, and that’s why these facilities are being put in place.
The Fed’s move is also evidence of just how important these emerging markets have become and how vital the dollar remains. So when liquidity problems arise around the world, it’s up to the Fed to deal with them.
In New York, I’m Jeremy Hobson for Marketplace.
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