Worried about the "weaponization" of US dollar swaps, European officials discuss preparing for the "worst-case scenario": establishing their own US dollar reserve pool.

European financial stability officials are discussing pooling US dollars held by non-US central banks to reduce dependence on the US financial system.

On November 13, according to media reports citing five sources, European financial stability officials are discussing whether to consolidate dollar reserves held by central banks outside the US and establish an alternative to the Federal Reserve's funding support mechanism in order to reduce reliance on the Trump administration-led US.

The Federal Reserve's funding support mechanism refers to providing dollar loans to other central banks, serving as a lifeline during periods of market stress to ensure global financial stability.

Media reports citing interviews with over a dozen officials from European central banks and regulatory bodies indicate they are concerned these mechanisms might be weaponized by the Trump administration. Two of the sources said that concern peaked in April this year, when Trump’s tariff threats shook the global financial system.

WallstreetCN mentioned in June that although Powell and other Fed officials have strongly defended the value of swap agreements, the real worry will come after Powell leaves office next May.

At that time, will the new Federal Reserve Board further bind financial tools to geopolitics? It now seems the European Central Bank is still preparing for the "worst-case scenario."

The Dollar Liquidity Pool Faces Practical Obstacles

According to media citing some sources, consolidating dollar reserves will face logistical challenges and may not be feasible.

Nonetheless, reports say discussions continue at the working level, not the top decision-makers of the European Central Bank, and involve central banks within and outside the eurozone. One official noted that some national central banks in the eurozone are pushing for this plan.

European officials point out that although non-US central banks together hold hundreds of billions of dollars in cash, this is not comparable to the Federal Reserve, the issuer of the world’s reserve currency with “near bottomless pockets.”

They say that such a dollar reserve pool might be able to address local and short-term liquidity strains, but it cannot play a decisive role during widespread market turmoil.

Moreover, any attempt to pool reserves will face both logistical and political challenges.

A senior central bank official pointed out that even a hint that the Fed might cut off swap lines would put enormous pressure on the global financial system. In such a scenario, it would be hard for any central bank to continue sharing its own dollar reserves with others.

Asian Experience and Other Alternatives

On their search for ways to reduce dependence, European officials do not lack precedents. Other countries and regions have tried pooling resources to enhance financial resilience.

ASEAN, together with China, Hong Kong, Japan, and South Korea, has established the "Chiang Mai Initiative," a multilateral currency swap arrangement aimed at providing assistance to member nations, which has grown to $240 billion.

Bank of Japan Governor Kazuo Ueda, when asked about financial risks in July, referred to the initiative and emphasized:

It will be very important to continue trying multilayered approaches like swap lines.

Besides the reserve pool proposal, European officials are also considering other measures to boost resilience, such as tougher scrutiny of lending institutions.

According to reports, two eurozone banking executives said scrutiny of banks is being strengthened, requiring them to develop plans for obtaining dollars in markets such as Asia and the Middle East, and to conduct stress tests on these plans.

A participating official in the discussions was quoted as saying that the issue of building resilience without relying on the US is raised at every inter-central bank meeting.

Not the Primary Concern but Worst-Case Scenario Must Be Considered

During market stress, demand for dollars usually surges, and shortages can worsen problems. Federal Reserve tools not only help alleviate this, but also serve broader US interests.

WallstreetCN previously mentioned that on March 27, a Deutsche Bank report noted the Fed’s dollar swap lines are the key tool for global financial stability, far more influential than tariffs. The dollar swap mechanism controls a $97 trillion FX swap market, equivalent to the combined global GDP.

By providing dollars, the Fed ensures overseas instability does not escalate into a full-blown financial crisis affecting the US. Usage of these tools peaked at $449 billion during the COVID-19 pandemic in 2020.

Reports say that at a European Central Bank Governing Council meeting a few months ago, Klaas Knot, then Dutch Central Bank president and FSB chairman, had listed dependence on swap lines as one of several potential risks.

Although a European Central Bank regulatory official said losing the swap lines is not the "primary concern," debate about finding alternatives to ensure financial stability persists among the ECB and several national central banks.

According to reports, what European officials truly worry about is what might happen after Powell's term ends in May next year, because Trump has indicated he may select the next Fed chair before the end of this year.

Another source summarized in the report that European officials "need to consider the worst-case scenario."

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