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September 19th 2008

ESF Used to Prop Up Dollar…Kind of

The Treasury Department has officially dipped into the Exchange Stabilization Fund (ESF), the obscure and rarely utilized pool of foreign exchange whose ostensible purpose is to stabilize forex markets in times of uncertainty. The Treasury surely skirted this mandate by using a portion of the reserves to provide insurance to money market funds, which are facing a sudden collapse of confidence in the latest chapter of the credit crisis. Although, the move was not without precedent, since the ESF was used as a source of capital for a loan to Mexico as recently as 1995. Ironically, the Treasury’s actions this time around will surely provide a boost to capital markets, thereby reinforcing the notion that the US remains the safest place to invest in crisis situations, which in turn, supports the Dollar. The Wall Street Journal reports:

The Fund, which now amounts to $50 billion, was created in 1934 to conduct interventions in foreign exchange markets. The enabling statute gives the president and Treasury secretary enormous latitude to act without prior consent of Congress.

Read More: The Exchange Stabilization Fund to the Rescue — Again?

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Posted by Adam Kritzer | in Central Banks, Politics & Policy, US Dollar | No Comments »

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