Deutsche Bank: Fed liquidity withdrawal threatens dollar's reserve currency status

The US Federal Reserve's (Fed) withdrawal from its time-tested liquidity support mechanisms could pose the greatest threat to the dollar’s reserve currency status since the mid-20th century, according to Deutsche Bank economists.

As experts of the organization believe, the Trump administration may pressure the Fed to withdraw from global financial markets during periods of economic instability. However, there are currently no indications that the US president plans to interfere with the Fed or demand cuts to its swap lines, a crucial liquidity tool used by the central bank during market turmoil. Deutsche Bank notes that uncertainty about the reliability of these swap lines could weaken confidence in the dollar.

Should the Fed withhold liquidity support during a crisis, or worse, weaponize this mechanism for political objectives, the consequences would be far-reaching. The dollar would spike dramatically, forcing global financial institutions to scramble for dollar funding. This self-reinforcing cycle would create explosive demand for the US currency.