De-Dollarization Dilemma: The Impact of US Policies on Global Currency Confidence

Amid rising tensions over U.S. financial policies, European officials are questioning the reliability of the Federal Reserve's dollar funding, highlighting potential global shifts towards reduced dollar reliance. Deutsche Bank analysts warn of financial instability and U.S. asset sell-offs if support is withdrawn.

The Federal Reserve's vital role in global financial stability could be compromised if it withholds dollar funding from allies during crises, Deutsche Bank analysts have warned. This move might prompt a significant shift away from dollar reliance, which analysts describe as a 'double-edged sword' for the United States.

According to a Reuters report, European central banking and supervisory officials are growing uncertain about their ability to rely on the U.S. central bank for critical funding, especially after recent policy shifts under the Trump administration. Historically, the Fed has provided crucial dollar funding to the European Central Bank and other key institutions during market stresses.

Analysts George Saravelos and Oliver Harvey highlighted that withdrawing this support carries significant risks, potentially leading to heightened dollar funding costs and a surge in U.S. dollar value. Such financial turbulence could also impact the U.S., triggering a sell-off of American assets. There are concerns that the Fed's swap line policies might become a tool for U.S. foreign policy objectives, influencing global financial strategies.

(With inputs from agencies.)