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Europe Questions Fed’s Reliability for Dollar Liquidity Amid Trump Policies
Some European officials worry about relying on the U.S. Fed for dollar funding in crises, fearing pressure from the Trump administration. But can they find alternatives?
ND
by News Desk
2025-03-22
Europe Questions Fed’s Reliability for Dollar Liquidity Amid Trump Policies

Some European central banking and supervisory officials are questioning whether they can still rely on the U.S. Federal Reserve to provide dollar funding during financial crises, six sources told Reuters. While they believe it remains highly unlikely that the Fed would cut off such support, concerns over the Trump administration’s policies have shaken their confidence.

The informal discussions—reported for the first time by Reuters—stem from broader worries about U.S. commitment to international cooperation. President Donald Trump’s stance on key global issues, including his handling of Ukraine, tariffs on European allies, and a shift toward economic protectionism, has raised doubts in European financial circles.

Is the Fed’s Backstop Still Guaranteed?

The U.S. Federal Reserve has long served as the global financial system’s ultimate safety net, providing dollar liquidity to central banks worldwide in times of market stress. This was evident in 2023, when the Fed helped prevent a financial meltdown by supplying billions of dollars to the Swiss central bank amid Credit Suisse’s collapse.

The European Central Bank (ECB) and other regulators routinely assess financial vulnerabilities, and the question of alternatives to the Fed has become part of that broader analysis. However, those involved in these discussions acknowledge there is no real substitute for the Fed’s dollar backstops.

Concerns Over Political Pressure on the Fed

While the Federal Reserve operates independently of the U.S. government, some European officials fear that political pressure from the Trump administration could influence its decisions over time. Four of the six sources familiar with the conversations expressed concerns that the U.S. government might attempt to pressure the Fed into suspending or limiting its liquidity backstops.

The White House did not respond to requests for comment, and the Fed declined to comment on the matter.

Europe’s Heavy Dollar Exposure

A key factor driving these concerns is the reliance of European banks on U.S. dollar funding. About 17% of euro-zone banks’ funding is in dollars, according to a recent ECB study. Any disruption in access to dollar liquidity could create significant financial stress across European markets.

Despite these worries, five senior eurozone central bank officials told Reuters they still see the risk of the Fed withholding liquidity as a remote possibility. Any such move would have severe consequences for global markets, potentially destabilizing the dollar’s role as the world’s reserve currency and undermining demand for U.S. government debt.

Looking for Alternatives—But Finding None

European banking officials have been informally exploring possible alternatives to the Fed’s liquidity support, but so far, no viable substitute has emerged. “There is no good replacement for the Fed,” one source said.

While European policymakers are expected to formally discuss the issue in the near future, the ECB’s leadership, including President Christine Lagarde, has publicly stated that the working relationship with the Fed remains unchanged.

As global financial uncertainty grows, Europe’s reliance on the Fed’s backstop remains a critical issue. Whether political tensions will lead to real disruptions—or if the Fed’s traditional role will hold firm—remains to be seen.
Tagged:

finance

Donald trump

FederalReserve

ECB

DollarLiquidity
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