Comment by seanhunter

A currency swap absolutely isn't "basically a line of credit". Any swap is a credit agreement insofar as each party is committing to future possible liabilities, but a currency swap is a very standard instrument which is part of central banks' monetary policy toolkit and helps them in their mandate to ensure currency stability. Swaps can be extremely flexible so the terms differ wildly, but they're not generally a line of credit that can be drawn from, they're an agreement to pay or receive amounts based on future movements of some underlying rates.

So what is a currency swap. Well any swap is an agreement with at least two legs, a pay leg and a receive leg. The normal type of swap is a interest rate swap so say I agree to pay you every month 3% fixed interest on 10m USD and you agree to pay me some floating rate (say 3m usd libor + 100bps) interest on the same amount. So every month we do a calculation where if libor+100 is greater than 3 then I pay you otherwise you pay me. We might do this to hedge our interest rate exposure. Like say you're a bank and I'm a bank and most of my borrowers are fixed rate mortgages and most of my savings accounts pay floating rate interest. I want a hedge so the floating rate doesn't end up costing me too much.

A currency swap is like that but with different currencies. So say we change things so it's 10m USD on one side and 15m EUR on the other side and we agree to exchange principal amounts. So that sets an exchange rate of 1.5 as well as the interest rate thing from before. If interest rates or exchange rates now move, this provides a hedge. So the hedge now is not just against the rate changing but also against the currency moving adversely. Central banks use this to ensure the import/export vs domestic balance of their economy is appropriate given the levels of trade between nations and also as a hedge against adverse currency movements affecting both assets they hold (yes they hold bonds etc) and their outstanding debt (which for the Fed will include "Eurobonds" they have issued in other currencies than USD).

https://www.investopedia.com/terms/c/currencyswap.asp is a general explanation

https://www.ecb.europa.eu/ecb-and-you/explainers/tell-me-mor... is the perspective of a central bank on currency swaps and their use