Foreign exchange swaps

Foreign exchange swaps have appeared for some time in the intervention toolkit of many central banks around the world, although their popularity seems to be on the wane. In a Bank for International Settlements survey taken in 1997 (BIS 1997, p. 332), seven of fourteen industrial-country central banks surveyed listed foreign exchange swaps against either the U.S. dollar or the deutsche mark (or both) among the tools used to conduct open market intervention. Of those seven, five-Austria, Belgium, Germany, Italy, and the Netherlands-discontinued foreign exchange operations when they became part of the European Monetary Union. Of the remaining two, Australia and Switzerland, only the latter has used foreign exchange swaps extensively, at some point as its main intervention tool, with the total amount of swaps hovering for years at about 40 percent of the monetary base. This use partly reflected the limited depth of domestic debt markets associated with limited fiscal deficits historically incurred by the Swiss government.