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As frequent readers know, Zero Hedge compiles an update of the Fed's balance sheet every week, based on the most recent H.3 and H.4.1 statements. One odd trend that has caught our attention is the virtual disappearance of central bank liquidity swaps as disclosed in the weekly H.4.1 report.

The historical low level for this metric was in the pre-Lehman days when it averaged about $60 billion weekly. Then in the depth of the crisis it peaked at just under $600 billion in December 2008. Yet, oddly, even though Europe's economic and monetary situation has deteriorated since then, the foreign CB swaps have plunged, and are now almost at pre-Lehman levels: the most recent reading was of $100 billion, a half a trillion decline from the peak! Two main questions arise:

1. Is this swap contraction premediated, and is the Fed essentially forcing foreign Central Banks to sell dollars into the open market, thus driving the dollar persistently lower. A comparison of the DXY with the total outstanding in CB swaps indicates that there, if nothing else, a strong correlation between the two.

2. What will happen with the foreign Central Banks end up needing the US' swap backstop again? Even if the dollar devaluation is not an ulterior motive but merely a side-effect of this balance sheet contraction, the next time half a trillion in CB swaps is pumped into the system, one can only imagine the consequences for the dollar. If half a trillion taken out is what it took to majorly whack the dollar (and to make commodities and stocks more attractive to foreigners), then the inverse should have a diametrically opposite effect. Of course, the Fed is pricing to perfection as usual, and keeping its fingers crossed it will never need to loosen up its CB swap lines again. That always works as a strategy, until it doesn't. And if recent feedback from Europe is any indication, the next strategy for Bernanke is the old ostrich head in the sand routine.

Source: Are the Fed's Rapidly Disappearing Central Bank Liquidity Swaps Crushing the Dollar?