(Bloomberg) — The withdrawal of a time-tested liquidity backstop offered by the Federal Reserve would represent the greatest risk to the dollar’s status as a reserve currency since the end of World War II, according to Deutsche Bank.
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European central banking and supervisory officials have held informal discussions about the possibility that the Trump administration will push the Fed to step back from global funding markets in times of market stress, Reuters reported this week, citing unnamed sources.
There has not been any indication that the Trump administration wants the Fed to scale back the so-called swap lines that the central bank has offered during past crises. But the reported conversations in Europe come as the US is stepping away from its European allies on other fronts. Even without the Fed taking action, any fears about the reliability of the swap lines could be damaging to the dollar, George Saravelos, Deutsche Bank’s head of foreign-exchange research, wrote in a note to clients Thursday.
“Were such concerns to prevail among America’s Western allies, it would likely create the most significant impetus to global de-dollarisation since the creation of the post-World War global financial architecture,” Saravelos wrote.
The swap lines, first launched during the 1960s, allow global institutions to borrow the greenback in exchange for their local currencies, easing demand for the dollar in times of financial stress. Revived in 2007 as the financial crisis heated up, the availability of this Fed support has long been considered an important — if infrequently-tapped — backstop during times of market turmoil.
The European Central Bank, Bank of Japan, Bank of Canada, Bank of England and Swiss National Bank currently have standing swap line arrangements with the Fed. At the height of the market dislocations wrought by the pandemic in early 2020, the lines were also extended to other central banks including the Bank of Korea, the Banco Central de Brasil, and the Banco de Mexico.
Saravelos noted that the Fed has sole responsibility for its programs. But, he said, the Trump administration can have an indirect influence on the central bank — either via “moral suasion” or through the figures appointed by Trump to its governing board.
