Mar 11, 2008, 19:24 GMT
Washington/Frankfurt - The US Federal Reserve on Tuesday spearheaded a new coordinated push by world central banks to bolster global economic confidence by announcing moves to pump 200-billion- dollar liquidity into markets.
The announcement sent stock markets in Europe and the United States higher and helped the dollar reverse earlier losses during the day against major currencies.
Under the new Term Securities Lending Facility, the Fed plans to lend up to 200 billion in Treasury securities to primary dealers secured for a term of 28 days, through a series of weekly auctions, bailing out in particular private mortgage-backed securities that have plummeted in value amid a housing and credit crisis in the United States.
The Fed's moves were backed by measures from the European Central Bank (ECB), the Bank of England as well the national banks of Switzerland and Canada. Tuesday's announcement came on top of 200 billion dollars the Fed made available last week to bolster liquidity through the existing Term Auction Facility and other tools.
Banks in the US have reported billions of dollars in writedowns since the summer of 2007 as a record number of homeowners have been forced to default on subprime mortgages. Falling housing prices and the credit crunch have stunted growth in the US and wreaked havoc with financial markets.
The ECB said it would lend banks 15 billion dollars, the Bank of England offered 20 billion dollars and the Swiss and Canadians 6 billion dollars and 4 billions dollars respectively in similar moves.
The central banks in a statement said the new loans were designed to ease a recent increase in 'liquidity pressures in funding markets.'
The Fed also authorized increases in its existing temporary reciprocal currency arrangements, also known as swap lines, with the ECB and the Swiss National Bank.
These arrangements will now provide up to 30 billion dollars and 6.0 billion dollars to the ECB and SNB respectively, representing increases of 10 billion dollars and 2.0 billion dollars.
The Fed extended the term of these swap lines through to September 30 this year in an attempt to bolster the US currency, which has dropped to record lows against the euro in recent weeks.
By late afternoon trading Tuesday, the euro had drifted back down to below 1.54 dollars after hitting an all-time high just short of 1.55 dollars earlier in the day.
European and US shares jumped more than 1.0 per cent Tuesday as investors appeared to take confidence from the central banks' move.
The blue-chip Dow Jones Industrial Average and the broader Standard & Poor's 500 index were up more than 1.5 per cent by Tuesday afternoon in New York.
As European trading came to an end Tuesday, Europe's blue-chip Stoxx 50 index added to gains run up during the day to finish up 1.3 per cent at 3062.41.
A similar picture emerged across national stock exchanges with Europe's premiere share market in London rising by 1.15 per cent to 5693.90 points and Frankfurt's DAX increasing 1.45 per cent to 6541.61.
In Paris, stocks ended the day up 1.33 per cent while Milan's main index recorded a 1.96 per cent rise. Zurich increased by 1.25 per cent with European investors also taking heart from the positive opening on Wall Street.
The central banks' move to inject fresh liquidity into global markets helped investors to lay aside renewed worries about oil prices, which also hit a record high Tuesday, shooting up to 109.49 dollars a barrel.
High energy prices have also weighed on the US and global economy. The Fed in January lowered its benchmark interest rate on two separate occasions by a total of 1.25 percentage points to 3 per cent, and analysts expected a further cut of as much as 0.75 points at its March 18 meeting.
Mirroring the mood on western European bourses, stock markets in emerging Europe also gained ground Tuesday with shares in Warsaw climbing by more than 2.0 per cent and Moscow as well as Prague increasing by more than 3.0 per cent.
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