Source: Jinshi Data

Deutsche Bank's latest research report points out that if the Federal Reserve withdraws the implementation of decades of global liquidity support mechanism, it will cause the US dollar to face the most severe crisis in the status of reserve currency since World War II.

Reuters quoted unnamed sources this week as saying that the ECB and regulators had informal discussions on a potential risk: Trump may pressure the Fed to withdraw from global financing markets when markets are turbulent.

While there is no sign that Trump has asked the Fed to shrink its currency swap agreement (the mechanism that provides global liquidity in previous crises), the U.S. is otherwise far away from its European allies.

George Saravelos, head of foreign exchange research at Deutsche Bank, warned that any question about the reliability of the currency swap agreement will hit dollar credit hard. This mechanism, which began in the 1960s and was restarted during the 2007 financial crisis, allowed central banks to exchange their local currencies for the US dollar, and was regarded as a key safety valve during a period of market turmoil.

The current standing swap agreements with the Federal Reserve include the European Central Bank, the Bank of Japan, the Bank of Canada, the Bank of England and the Swiss National Bank. During the peak of the epidemic in 2020, the network expanded to emerging market central banks such as South Korea, Brazil, and Mexico.

Salavelos wrote: "If this concern is prevalent among the U.S. Western allies, it could create the most significant driving force for global de-dollarization since the establishment of the global financial structure after World War II."

The report notes that although the Fed has the sole right to decide on its plan, Trump can have an indirect influence on the Fed - either through "moral persuasion" or through Trump's appointed council members. If the Fed refuses to provide liquidity support in times of crisis or uses it as a bargaining chip, it will trigger a chain reaction: the US dollar may soar in the short term due to global institutions, but it will accelerate countries to get rid of the US dollar dependence in the long term.

Salavelos specifically mentioned that Russia, which has not signed a swap agreement with the Federal Reserve, has continued to increase its holdings in non-US foreign exchange reserves and promoted de-dollarization in the past decade. If the market creates a crisis of trust in the role of the Federal Reserve's "final lender", Russia and other leading monetary system changes may gain new momentum.

Although the Federal Reserve launched a standing repurchase agreement mechanism for a wider range of foreign institutions in 2020 (allowing US dollars to be secured with US bonds), analysts believe that this cannot replace the systemic role of the swap agreement. Under extreme pressure scenarios, forced selling of US Treasury bonds or relying on private repurchase markets will intensify financial turmoil.