Major world central banks announced on Thursday that they planned to scale back massive injections of U.S. dollars into their banking systems as financial markets stabilize after a devastating crisis.
The U.S. Federal Reserve said it would begin to scale back short-term cash auctions in early 2010, while the European Central Bank, the Swiss National Bank, and the Bank of England announced they would curtail steps taken to ensure dollar liquidity.
The joint actions signaled a gradual removal of extraordinary measures central banks around the world have taken to prop up banks and financial systems during the worst period of instability since the Great Depression in the 1930s.
These emergency financing programs have done their jobs to stabilize credit markets, said Alex Roever, a strategist for J.P. Morgan Securities in New York.
The joint move comes as leaders of the world's 20 major economies gather in Pittsburgh, Pennsylvania to discuss the aftermath of the financial crisis.
They are expected to pledge to coordinate their withdrawal of government support for economies that are beginning to stabilize after the meltdown.
Analysts said the move shows central banks see less pressure on banks for short-term cash, but should not be seen as a move to begin to withdraw the monetary policy stimulus to economies that remain fragile.
This isn't part of the exit strategy per se, said Chris Rupkey, an economist for Bank of Tokyo/Mitsubishi UFJ in New York. It just recognizes that banks have less need for liquidity.
The Fed said it will trim the sizes and maturity lengths of auctions, while continuing Term Auction Facility (TAF) short-term cash auctions at least through January.
These schedules are consistent with the intention ... to gradually scale back these facilities in response to continued improvements in financial markets, the Fed said in a statement.
The U.S. central bank said it has adjusted the auctions to take into account anticipated heightened market pressures at year end. It said it would cut the size of 84-day auctions to $50 billion in October and $25 billion in November and December, while reducing the maturities of those auctions.
It also said it will consider putting in place some type of permanent auction facility for short-term funds.
The ECB said it would scale back its provision of U.S. dollar liquidity to just one-week funds. It said it would keep providing U.S. dollar funds until January, but would stop 84-day operations after the operation on October 6, although they could be restarted in the future if needed.
The Bank of England announced plans to suspend its three-month dollar repurchase operations after the last one on October 6 but will continue to offer 7 day funds until January.
The Swiss National Bank said it will stop 84-day dollar liquidity operations.
(With additional reporting by Krista Hughes in Frankfurt, Fiona Shaikh in London, Sven Egenter in Zurich, and Ellen Freilich and Richard Leong in New York)
(Reporting by Mark Felsenthal; Editing by Simon Denyer)