U.S. dollar and Euro banknotes are seen in this illustration taken March 19, 2025. REUTERS/Dado Ruvic/Illustration/File Photo
European Officials Question Reliability of U.S. Federal Reserve’s Dollar Backstops
European central banking and regulatory officials are privately questioning whether they can continue to rely on the U.S. Federal Reserve to provide dollar funding during market stress, according to six sources familiar with the matter. While they consider it highly unlikely that the Fed would withdraw its financial backstops, concerns over U.S. political stability under President Donald Trump have prompted informal discussions about potential alternatives, Reuters reports.
Concerns Over U.S. Policy Shifts
The skepticism stems from the Trump administration’s unconventional foreign policy shifts, including:
- Closer ties with Russia, raising doubts about U.S. commitment to European security.
- Trade protectionism, including tariffs on European allies.
- A perceived shift away from international cooperation, which some fear could extend to financial stability measures.
The Fed’s Role in Global Stability
Historically, the Fed has provided dollar liquidity to foreign central banks through swap lines and funding mechanisms to prevent financial crises. For example:
- In 2023, the Fed extended billions in dollar funding to the Swiss central bank, enabling Credit Suisse to meet cash demands before its collapse.
- During the 2008 financial crisis, the Fed’s dollar swap lines helped stabilize global markets.
Despite this track record, European officials are now privately debating whether the U.S. government might pressure the Fed to curtail such support, two sources said.
No Good Alternative to the Fed
Discussions have taken place in informal settings among senior European Central Bank (ECB) and EU banking supervisors, though not within official policymaker meetings, sources said. These conversations have explored potential alternatives to Fed-backed dollar liquidity but have found no viable substitute.
One official described the talks as part of routine risk assessments for financial stability but acknowledged growing concerns about “less international cooperation” from U.S. authorities.
Uncertainty Around Trump’s Influence on the Fed
Although the Fed is independent, some European officials worry that a second Trump administration could exert increased pressure on the central bank, potentially leading to restricted access to dollar funding for European banks.
- The ECB has declined to comment on the matter.
- The White House has not responded to inquiries.
- The Fed has not signaled any intention to change its backstop policies.
However, given that 17% of euro-zone banks’ funding is in dollars, access to the Fed’s liquidity lines remains critical, according to an ECB study.
Remote But Serious Risk
While European officials consider it unlikely that the Fed would cut off financial support, they acknowledge that such a move would have profound consequences, including:
- Global financial instability, causing ripple effects across markets.
- Potential damage to U.S. economic interests, as it could undermine the dollar’s dominance and reduce demand for U.S. government debt.
The ongoing discussions suggest that while the risk remains low, European financial authorities are increasingly preparing for uncertain U.S. policy shifts in the coming years.
COMMENTS