The Fed has placed a safety net under the global dollar. Can it undermine?

Copyright © HT Digital Streams Limit all rights reserved. Vincient Arnold, Barrons 5 min read May 16, 2025, 01:07 IST Fed’s roughlines, confirmed by Powell, is essential for the global dollar liquidity, which helps US economic goals by facilitating the hollow. (Beeld: Reuters) Summary The withdrawal of the Fed’s ruillines would be a step to end the role of dollar as a reserve currency, writes Vincient Arnold in a gas comment. Federal Reserve chairman Jerome Powell confirmed last month that the Fed was prepared to expand ruillines to other central banks “if necessary.” About the author: Vincient Arnold is a research fellow at the Yale Program on Financial Stability and Write Discursive etc., a blog about geopolitics and the financial system. Foreign officials have recently become concerned that the Federal Reserve may refuse to expand its central bank omruillines during a crisis. Although the Fed has not changed its longtime policy, Europeans (and their banks) take the possibility seriously, given the Trump administration’s willingness to take unprecedented actions in the service of its economic goals. But depriving the reliability of the global dollar security net would be a self -damaging policy. Swap lines are arrangements. The Fed strikes with other central banks to provide dollars in moments when liquidity is rare. Versions of these financial stability instruments have existed for decades, but it used widely during the 2008-09 financial crisis. The Fed’s provision of global dollar liquidity is a public interest, but it also benefits the US dollar markets abroad offers credit to US households and businesses. A collapse in those markets would lead to US infestation, although the Fed and other central banks describe it as neutral financial instruments, I and other scholars have characterized them as implicitly geopolitical tools, as it may be in line with national security and economic interests. The Trump administration may be tempted to see them exclusively in that light. However, a tractors of foreign US dollar markets would be with many of the Trump administration’s core trade and economic goals. The Fed’s exchanges serve as exemption valves for pressure abroad to preserve dollar assets – a pressure that works against the administration’s declared macro economic objectives. The US trading deficit, the current account, is financed by foreign capital inflows, the capital account. Reducing the trading deficit is clearly a priority for Trump administration. To do this, it implements it to the current account, such as rates. Many analysts believe that capital account intervention is also on the menu. Influential advisors for administration, such as Stephen Miran, chairman of the Board of Economic Advisors, discussed the possibility, although Miran has since said that the idea is not the administration policy. Former US trade representative Robert Lighthizer also considered similar ideas. The logic of these suggestions is that reducing the financing of the US deficit is one way to reduce the deficit itself. Although there is reason to question such causal arguments, strong academic evidence is concerned with the fact that foreign accumulation of dollar claims has contributed to the US trade deficit. Swaplines can reduce the need for foreign governments and central banks to hold dollar reserves, as crude lines provide an alternative drug of dollar insurance. Asian economies discovered this relationship during their financial crisis in 1997, as economy commentator Martin Wolf said recently. They discovered that they couldn’t push dollars during a run. “Their conclusion was that our dollars should accumulate without restriction, more or less, and execute the surpluses on the current account to collect these dollars. These two things came together and this led to an enormous expansion of the US external deficit,” he said. That excess accumulation of the reserve contributes to harmful global imbalances, such as Matthew C. Klein, an economy journalist, and Michael Pettis, a finance professor at the University of Beking, argued. Of course, not all reserve congestion is solely motivated by financial stability and dollar deficiencies; Other contributors include currency control and trade practices. But Wolf correctly identifies the self-assurance role of reserve congestion-it is war box building. Recent work by Haillie Lee and Phillip Lipscy at Princeton and Stanford respectively find strong empirical evidence that the accumulation of the reserve in East Asia (a country of large surpluses and reserves) that begins in the late nineties is more driven by confident motifs than the trade policy. Anecdotally, this is in line with private discussions with the central bank staff in one of the hardest hit nations by the Asian financial crisis. They are not ecstatic about the dollar centrality, but they must handle it. They do not think the International Monetary Fund will help in crisis (or would be punishing if it does). And they don’t think they will get a rough line from the Fed. So they have concluded that the solution is to set up dollar assets separately or collectively with other Southeast Asian countries. Without access to the IMF or Swaps, you should expect reserve stock to increase. This implies that at risk countries deliberately manage trade surpluses to finance the reserve balances and thus contribute to the US capital account surplus (and trading deficit, all else). As Wolf has recently put it, the resolution of global trade conflicts depends on the structure of the international monetary system. Solutions for this problem may include a more muscular role for the IMF in the global financial safety net, something that the Trump administration probably oppose; stronger and/or more rough lines (not a Trump preference); or replace the dollar as the global reserve currency (certainly not a Trump preference). Call it the Trump trilemma. An expansion of additional Fed ruillines will help relieve part of the foreign appetite for dollars. But it is not a miracle. As Michael Bordo and Bob McCauley, monetary policy experts, pointed out, the foreign official possession of dollar assets has only formed a small part of financing the current account deficit since the 2008 crisis. Central banking lines illuminate the appetite for dollar asset for official containers-central banks, sovereign-rich funds and other reserve managers. Although the data is notorious to detect, it is clear that foreign private possessions of Treasury have been much of the increase in total foreign possession over the past decade. (The evidence is less extreme for agency debt, but there is a similar trend). Ruillines don’t help there. Furthermore, the premise that foreign official investors have an infinite demand for dollar assets, increasingly shaky, with recent reporting suggesting that one of the world’s largest official reserve managers – China’s foreign exchange state administration – is planning to move away from dollar assets. This will match the long-term trend of the falling dollar share in the world reserves. Nevertheless, foreign official reserve managers are still large marginal buyers of dollar assets. They were responsible for about fifth of all long -term US security ownership from last year. To the extent that the Fed’s crude lines can reduce the pressure on reserve drivers to build up dollar assets, which can readily make it available, it would match the Trump administration’s goals. By taking steps to reduce foreign official possessions of treasury and agencies, while withholding crude lines to also undermine the role of the US as the world’s safe asset producer. If Washington really wanted to withdraw himself as the issuer of the global reserve currency, the Fed would be forced to withdraw its ruin lines would be a step in that direction. Guest commentary like this was written by writers outside the Barron’s news room. This reflects the perspective and opinions of the authors. 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