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Fed Official: European Crisis Shows Vulnerability

Although financial conditions in the United States have improved since the 2008 crisis, events in Europe show their fragile underside, a Federal Reserve official said Thursday.

Wall Street
CNBC.com
Wall Street

"The funding markets evidently remain somewhat vulnerable" given the debt crisis in Europe, Fed Vice Chairman Donald Kohn said in remarks prepared for delivery in Canada.

That's why the Fed revived a program with other central banks on Sunday to swap currencies, he said. The Fed is lending much-in-demand dollars to other central banks in exchange for their currencies. In turn, the central banks can lend the dollars out to banks in their home countries to prevent the crisis from spreading further.

The Bank of Canada, the Bank of England, the European Central Bank, the Swiss National Bank and the Bank of Japan are involved in so-called dollar "swap" effort.

European banks need dollars to lend to companies across the Continent. European companies that have operations in the U.S. pay their employees in dollars and buy raw materials with the U.S. currency. Also, oil and other commodities are priced in dollars around the world.

The swap program, opened in 2007, was shut down in February as financial conditions in the United States and abroad had shown signs of improving.

The European debt crisis first erupted in Greece and there are fears that it could spread to Spain, Portugal and other eurozone countries. The crisis has pushed up demand for the U.S. dollar and has sharply weakened the value of the euro, the currency used by 16 European countries.

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