European Officials Question Dependence on US Federal Reserve for Dollar Funding

European Officials Question Dependence on US Federal Reserve for Dollar Funding

Concerns Over US Commitment to Financial Stability

Some European central banking and supervisory officials are questioning whether they can still rely on the U.S. Federal Reserve to provide dollar funding in times of market stress, according to six sources familiar with the matter.

While these officials consider it highly unlikely that the Fed would fail to honor its funding backstops, their trust in U.S. financial institutions has been shaken due to some policies introduced by the Trump administration.

Factors Driving the Discussions

President Donald Trump’s break from traditional U.S. policies has raised concerns about:

• The U.S. stance on European security.
• Tariffs imposed on U.S. allies.
• Statements appearing to support Russia’s position on Ukraine.

These shifts have led to discussions in some European financial forums about whether the U.S. government might pressure the Fed to suspend dollar liquidity backstops.

No Clear Alternative to the Fed

European officials have explored potential alternatives but concluded that no viable substitute exists. The Fed has historically provided crucial dollar liquidity to the European Central Bank (ECB) and other institutions during market disruptions.

Informal Discussions Among Officials

The informal conversations, which have taken place outside of regular policymaker meetings, involve senior European central banking and supervisory officials. These discussions are part of broader financial risk assessments and include considerations about:

• Potential disruptions in dollar liquidity.
• The impact of U.S. government policies on global financial stability.
• European banks’ reliance on short-term dollar funding.

Fed’s Role in Global Financial Stability

As an independent institution accountable to Congress, the Fed has not indicated any intention to restrict its funding lines. However, some European officials are concerned that political pressure could influence future decisions.

Dollar Dominance and Euro-Zone Exposure

The U.S. dollar remains the dominant currency in global trade and capital flows. In times of crisis, investors and financial institutions seek refuge in the dollar. Recent examples of Fed support include:

• Providing tens of billions of dollars to the Swiss central bank in 2023, helping Credit Suisse meet liquidity demands.
• Acting as a first line of defense against foreign financial instability affecting U.S. markets.

A recent ECB study found that approximately 17% of euro-zone banks’ funding is in dollars, highlighting the importance of continued access to Fed credit lines.

Future Considerations

Despite concerns, the likelihood of the Fed curtailing its financial backstops is considered remote. Such a move could have severe consequences, including:

• Global financial instability.
• A decline in the U.S. dollar’s dominance.
• Reduced demand for U.S. government debt.

However, as discussions continue, European officials remain cautious about the potential for reduced international financial cooperation. The issue is expected to be examined further in formal policymaker discussions.

“European Officials Question Dependence on US Federal Reserve for Dollar Funding” “European Officials Question Dependence on US Federal Reserve for Dollar Funding” “European Officials Question Dependence on US Federal Reserve for Dollar Funding” “European Officials Question Dependence on US Federal Reserve for Dollar Funding”