Bank Of England Scrutinises Lenders for Dollar Risk Amid Trump Worries

• The Bank of England (BoE) has asked some lenders to test their resilience to potential U.S. dollar shocks, the latest sign of how the Trump administration's policies are eroding trust in the U.S. as a bedrock of financial stability.
• As the leading currency for global trade and capital flows, the U.S. dollar is the lifeblood of global finance. However, President Donald Trump's break from long-standing U.S. policy in areas such as free trade and defence has forced policymakers to consider whether the emergency provision of dollars in times of financial stress can still be relied on.
• The BoE requested that some lenders assess their dollar funding plans and the degree to which they depend on the U.S. currency, including for short-term needs, and scenarios where the U.S. dollar swap market could dry up entirely. It is believed that no bank could withstand such a shock for more than a few days, given the dominance of the dollar in the global financial system and lenders' dependence on it.
• Furthermore, should dollar borrowing become harder to obtain and more expensive for banks, it could hamper their ability to carry on meeting demands for cash. Ultimately, a bank that struggles to gain access to dollars could fail to meet depositor requests, undermining confidence and triggering further outflows.
• While the U.S. Federal Reserve has said that it wants to continue to make dollars available in the financial system, Trump's policy shifts have prompted European allies to reexamine their dependence on Washington. Meanwhile, Trump's repeated criticism of Fed Chair Jerome Powell and reports that the central bank chief may get fired are raising concerns of a loss of independence at the Fed and the repercussions on the dollar.
• The BoE has in the past asked banks how they would ensure a supply of dollars during times of stress, as in a 2019 system-wide check on banks' liquidity during a crisis, but the renewed focus on the U.S. currency showed how Trump's actions have revived such concerns. While global banks can tap U.S. dollar deposits to withstand temporary shortfalls, regulators worry that international banks remain exposed to dollar risk.

(Source: Reuters)