Authored by Mike Shedlock via MishTalk.com,
Can the EU rely on dollar funding by the Fed with Trump in play?
Dollar Funding Under Trump
Reuters reports Some European officials weigh if they can rely on Fed for dollars under Trump
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, six people familiar with the matter said, casting some doubt over what has been a bedrock of financial stability.
But the European officials have held informal discussions about this possibility – which Reuters is reporting for the first time – because their trust in the United States government has been shaken by some of the Trump administration’s policies.
President Donald Trump has made a sharp break from long-standing U.S. policy in several areas, such as appearing to endorse Russia’s position on Ukraine, raising questions about U.S. commitment to European security and imposing tariffs on its allies.
In some European forums where participants assess potential risks to the financial system, these officials have discussed scenarios under which the U.S. government might pressure the Fed to suspend the dollar backstops, two of the sources said.
Some officials have been gaming out whether they can find alternatives to the U.S. central bank, the two sources said. In times of market stress, the Fed has provided the European Central Bank and other major counterparts with access to dollar funding.
The takeaway from these discussions: there is no good substitute to the Fed, said the six sources, who include senior ECB and European Union banking supervisory staff with first-hand knowledge of the conversations.
The sources all requested anonymity to speak candidly about the private deliberations.
The ECB and the Fed declined to comment for this article. The White House did not respond to a request for comment.
Remarkable Discussion
My answer is the same as what sources told Reuters.
“The sources consider it highly unlikely the Fed would not honour its funding backstops — and the U.S. central bank itself has given no signals to suggest that.”
However, that Europe sees any need for this discussion is remarkable in and of itself.
The Fed is still independent, at least for now. But it’s fair game to assume the US Treasury might pressure the Fed to do whatever the Hell Trump wants.
Weaponization of Swift
Please consider the March 2022 Richmond Fed article What Is SWIFT, and Could Sanctions Impact the U.S. Dollar’s Dominance?
The recent removal of Russian banks from the SWIFT messaging system has highlighted the importance of payments in supporting economies. But the weaponization of SWIFT has also left some commentators worrying about the loss of the U.S. dollar’s dominance, as it might drive banks and firms to other substitutes. This Economic Brief discusses the economics of SWIFT and explains why emigrating from the U.S. dollar may be more difficult than we thought.
The Richmond’s Fed’s assessment is self-serving. Yet, it appears accurate. Importantly the Fed even admits weaponization, the emphasis was mine.
Dollar Weaponization Expands
On May 13, 2023 I commented Dollar Weaponization Expands – FDIC Message to Foreign Depositors Is Don’t Trust the US
Systemic Risk Assessment
The FDIC made a “systemic risk exception” for Silicon Valley Bank to protect depositor funds beyond its limit of $250,000 per bank account.
FDIC’s stated “insurance” is for US depositors only. But the exception to make all US depositors whole means foreign depositors bear 100% of responsibility for the collapse of SVB.
Since bond holders rate higher than unsecured depositors, and the FDIC had significant losses rated to SVB, foreign depositors may get zero cents on the dollar.
If you are a foreign depositor at any small or midsized bank, the FDIC is affirming that you better get your money out now.
What Does China Do With a Dollar That’s No Longer Risk Free?
On March 18, 2022, I asked What Does China Do With a Dollar That’s No Longer Risk Free? Buy Gold?
Q&A With Michael Pettis
Mish: Will China now hold more commodities and fewer dollars despite the pro-cyclical nature of it? More Euros or Yen over dollars? More gold?
Michael Pettis:
- “Given that so much of China’s “reserves” are now indirect and held by state-owned banks (all the increase since 2017) it’s hard to say what the currency composition of China’s reserves are.
- “Officially the US dollar is still by far the biggest component, but it is slowly declining.
- “I expect that this will continue as far as the official reserves go but, as you know, the hard part of reducing the US dollar component of your reserves is figuring out what the alternative should be, and with such high and growing reserves (once you include the indirect reserves at the state-owned banks) that is a very difficult question to resolve.”
Is China Dumping US Treasuries?
I post https://twitter.com/LukeGromen/status/1648364877302452225
“Strategists Joana Freire and Stephen Jen calculated that the greenback accounted for about two-thirds of total global reserves in 2003, then 55% by 2021, and 47% last year.”
This question comes up every year, and every year my answer is the same.
No, Luke Gromen, China masks its US treasury holding.
Here’s the correct take.
Here’s another take.
Setser “The dollar’s share of reserves didn’t actually change at all in 2022.“
But if the IMF’s data on reserve holdings is adjusted for changes in US bond market valuation, I don’t get any real US dollar sales —
No currency got large reserve inflows in 22 in fact.
— Brad Setser (@Brad_Setser) April 19, 2023
What About China?
And looking at reserves without also looking at the foreign assets of state banks and SWFs is so … 2012.
The cutting edge of flow tracking (imo) captures SWFs, forwards, state banks and the like …
— Brad Setser (@Brad_Setser) April 19, 2023
Setser “Looking at reserves without also looking at the foreign assets of state banks and SWFs is so … 2012.“
China masks its reserves in SOEs, something I have commented on many times.
Still More Fairy Tales of US Dollar Demise That Didn’t Happen
For discussion, please see my April 26, 2023 post Still More Fairy Tales of US Dollar Demise That Didn’t Happen
Sorry for the digression, but it’s an important one.
It is currently very difficult to avoid the dollar.
More Gold Backed BRIC Currency Silliness on Dethroning the Dollar
On July 7, 2023, I noted More Gold Backed BRIC Currency Silliness on Dethroning the Dollar
If Russia or China had a gold-backed BRIC, what would that even mean? Would you trust it? Buy it?
The BRIC is literally of zero threat to anyone.
Truth Social Post
“The idea that the BRICS Countries are trying to move away from the Dollar while we stand by and watch is OVER. We require a commitment from these Countries that they will neither create a new BRICS Currency, nor back any other Currency to replace the mighty U.S. Dollar or, they will face 100% Tariffs, and should expect to say goodbye to selling into the wonderful U.S. Economy.”
“They can go find another “sucker!” There is no chance that the BRICS will replace the U.S. Dollar in International Trade, and any Country that tries should wave goodbye to America.”
On November 30, 2024, I commented Trump’s Obvious Bluff Over BRICS Currency Proves He Is Clueless on Trade
Let’s start with the obvious. First, Trump is bluffing. Second, he is clueless as to what the real problem is.
Global Consumers of Last Resort
The US is stuck with the reserve currency because we have the largest, most open capital markets in the world, the world’s largest bond market, and a far better business climate than the EU, China, or Japan.
BRICS Irony
Trump demands a weak dollar.
True competition to the dollar in the form of alternate reserve currencies would actually help.
Trump Wants a Weak Dollar But Needs a Strong One
On March 16, 2025, I commented Trump Wants a Weak Dollar But Needs a Strong One
One way to get a weaker dollar is for the US to run huge budget deficits and for the Fed to not follow through with interest rate hikes.
But that conflicts with Trump’s promise to balance the budget. And balancing the budget would strengthen the dollar.
Strengthening the dollar would help with inflation but Trump wants a weak dollar.
Trump wants “made in America” but the US is the highest cost producer or nearly everything non-agricultural. So good luck with exports.
Trump demands no competition to the dollar, but that is one thing propping up the dollar!
It’s all so damn convoluted that Europe is now concerned over dollar funding.
US dollar avoidance is not easy, as discussed, but Trump is greatly increasing the incentive for nations to try.
I suggest the EU needs to focus on building an alternative to SWIFT, as soon as possible. The EU half-heartily tried, but gave up.
Try again, better this time.
Swift avoidance would not end dollar reliance, but it would help the EU find ways to avoid US sanctions. And a sanction showdown with the EU is coming.
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