ECB supervisors have urged banks to evaluate their dollar funding needs, especially during potential market distress. This stems from concerns that if President Trump influences the Federal Reserve (Fed) to restrict access, banks might face challenges in securing dollar funding.

In times of financial stress, the Fed usually offers lending facilities to major partners to ease dollar shortages. However, unpredictable policy moves by Trump have raised fears that these funding channels might be suddenly cut off.

Fed Support Concerns

Thus far, two sources have mentioned the Fed has never indicated an unwillingness to uphold its support mechanisms. Despite recent market fluctuations showing a reduced interest in the dollar, the ECB finds some solace in positive developments related to the US-China trade conflict.

While current trade relations offer a temporary break, the future remains uncertain.

The European Central Bank (ECB) has urged lenders under its supervision to take a sobering look at their exposure to dollar funding, particularly under stress scenarios. The original concern, if we break it down, is not so much about current shortages or shrinking access, but the plausible scenario where political influence—especially from the executive office in Washington—could impact the Federal Reserve’s willingness or ability to maintain its usual backstop facilities during a crunch.

When strain erupts in markets, dollar funding becomes a pressure point. The Fed typically steps in with swap lines or emergency liquidity to partners it trusts. That safety net has historically cushioned the edges of financial stability. What we’re being asked to prepare for, however, is a world in which that support might be used selectively or politicised.

So far, we’ve heard from internal sources suggesting the Fed hasn’t hinted that they’d roll back these arrangements. But that doesn’t mean the risk is off the table. Market watchers have noticed softening interest for dollars in some recent trades—likely a reflection of temporary calm around international trade disputes rather than a change in structural dependencies.

Strategic Adjustments

Draghi’s camp took some comfort from easing China-US trade tensions, but that calm may offer only a shallow buffer. If future political decisions outpace economic logic, then banks without hardened strategies for dollar sourcing might find themselves vulnerably positioned.

From here on, there needs to be clear modelling for stressed conditions. Let’s assume that the backstop won’t be there. What happens next? What liquidity can be retained in-house, and where would rollovers fail? These questions are not hypothetical anymore. Liquidity mismatches are already appearing in smaller funding centres, so the implications could filter up.

We’ve chosen to take this not as panic, but as instruction. Our derivative pricing models are being revised to factor in not just volatility but also counterparty funding risk in a scenario where central liquidity may arrive late—or perhaps not at all. This must include revisions across short-term interest rate assumptions, especially where dollar-pegged assets are concerned.

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