Market News
De-dollarisation could speed up with US isolationist policies, analysts say - REUTERS
Summary
- Deutsche Bank says bar "exceptionally high" for Fed to withhold liquidity
- Financial stress would spread to US markets, analysts say
- Rabobank sees "sea-change" in ties between the US and European allies
LONDON, March 27 (Reuters) - If the Federal Reserve, a bedrock of global financial stability, were to withhold dollar funding to allies during times of stress, the world could greatly reduce its reliance on the currency, creating "a doubled-edged sword" for the U.S., Deutsche Bank analysts said.
Reuters reported on Saturday that some European central banking and supervisory officials are questioning whether they can still rely on the U.S. central bank to provide such funding as their trust in Washington has been shaken by the Trump administration's policies.
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In times of market stress, the Fed has provided the European Central Bank and other major counterparts with access to dollar funding. The dollar is the dominant currency for economic trade and capital flows. "The bar for withdrawing support at a time of systemic financial stress would seem exceptionally high," analysts George Saravelos and Oliver Harvey said in a note to clients on Thursday, assessing possible scenarios and citing the Reuters article.
Without the Fed backstops, in the short term, "the dollar liquidity scramble would drive dollar funding costs higher, leading to a sharp appreciation of the U.S. dollar."
But financial stress would spread to the U.S. financial system as well, they added, and spillover effects could include "a fire sale of U.S. assets."
While the Fed is independent, "the U.S. administration can have an indirect influence both via moral suasion as well as the appointment of the Fed governing board", the analysts said.
"The U.S. could in theory use the availability of its swap lines in a selective manner, as a quid pro quo for other policy goals."
DE-DOLLARISATION RISK
For Jane Foley, Rabobank's head of forex strategy, the questioning by some European central banking and supervisory officials of the Fed's dollar support shows the "sea-change" in ties between the U.S. and European allies over the past few months and "the sphere of the disruptive influences of the U.S. President."
