Reciprocal Currency Arrangement

DEFINITION of 'Reciprocal Currency Arrangement'

Temporary arrangement between central banks to maintain a supply of a country's currency for trade with other central banks at a specified exchange rate. A reciprocal currency arrangement is only intended for overnight or short-term lending in order to maintain reserve requirements, liquidity and to keep financial markets functioning smoothly.

Also known as a swap line or swap network.

BREAKING DOWN 'Reciprocal Currency Arrangement'

Reciprocal currency arrangements exist to provide short-term access to foreign currencies. In the U.S., for example, a reciprocal currency arrangement entails both a spot (immediate delivery) transaction, where the Federal Reserve transfers dollars to a central bank and receives foreign currency in exchange; and a concurrent forward (future delivery) transaction, where the two central banks consent to reversing the spot transaction at a specified date. One purpose of a reciprocal currency arrangement is the support of a country's currency during periods of uncertainty or unusual market disruptions.

RELATED TERMS
  1. Liquidity

    The degree to which an asset or security can be quickly bought ...
  2. Federal Reserve Bank

    The central bank of the United States and the most powerful financial ...
  3. Reciprocal Currency

    In the foreign exchange market, a currency pair that involves ...
  4. Swap Network

    A worldwide network of central banks that establish a reciprocal ...
  5. Federal Open Market Committee - ...

    The branch of the Federal Reserve Board that determines the direction ...
  6. Central Bank

    The entity responsible for overseeing the monetary system for ...
Related Articles
  1. Personal Finance

    What Are Central Banks?

    They print money, they control inflation, and much, much more. All you need to know about central banks is here.
  2. Forex Education

    Currency Exchange: Floating Rate Vs. Fixed Rate

    Baffled by exchange rates? Wonder why some currencies fluctuate while others are pegged? This article has the answers.
  3. Personal Finance

    How The U.S. Government Formulates Monetary Policy

    Learn about the tools the Fed uses to influence interest rates and general economic conditions.
  4. Personal Finance

    The Currency Board: Understanding The Government's Bank

    Currency board, central bank - what's the difference? Find out more about this little-known monetary authority.
  5. Investing News

    What's the Fed Going to do in 2016?

    Learn about the factors that contribute to increases in the federal funds rate by the Federal Reserve and key economic indicators for 2016.
  6. Economics

    Forces Behind Interest Rates

    Interest is a cost for one party, and income for another. Regardless of the perspective, interest rates are always changing.
  7. Bonds & Fixed Income

    3 Risks U.S. Bonds Face in 2016

    Learn about the major risks for the bond market in 2016; interest rate increases, high-yield bond volatility and a flatter yield curve may be issues.
  8. Economics

    The Ripple Effect: Interest Rates and the Stock Market

    Investors should observe the Federal Reserve’s funds rate, which is the cost banks pay to borrow from Federal Reserve banks.
  9. Economics

    3 Things That May Happen at FOMC Meeting

    We are keeping a close eye on what the Fed will say about economic outcomes and participants’ viewpoints at the FOMC meeting this week.
  10. Economics

    A Look At Fiscal And Monetary Policy

    Fiscal and monetary policies provide our government and the Federal Reserve with two powerful tools to regulate the economy.
RELATED FAQS
  1. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
  2. What happens if interest rates increase too quickly?

    When interest rates increase too quickly, it can cause a chain reaction that affects the domestic economy as well as the ... Read Full Answer >>
  3. When was the last time the Federal Reserve hiked interest rates?

    The last time the U.S. Federal Reserve increased the federal funds rate was in June 2006, when the rate was increased from ... Read Full Answer >>
  4. Do lower interest rates increase investment spending?

    Lower Interest rates encourage additional investment spending, which gives the economy a boost in times of slow economic ... Read Full Answer >>
  5. How is the Federal Reserve audited?

    Contrary to conventional wisdom, the Federal Reserve is extensively audited. Politicians on the left and right of a populist ... Read Full Answer >>
  6. Who decides when to print money in the US?

    The U.S. Treasury decides to print money in the United States as it owns and operates printing presses. However, the Federal ... Read Full Answer >>
Hot Definitions
  1. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  2. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  3. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  4. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  5. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
Trading Center