Bank of England Orders Banks to Evaluate Dollar Dependence Amid Trump Policy Shifts

The Bank of England (BoE) has instructed several banks to evaluate their preparedness for potential shocks to the US dollar, as concerns over the impact of Trump’s policies on global financial stability escalate. The departure of the US from its traditional stances on free trade and defense has shaken confidence in the dollar, the world’s primary reserve and trade currency, causing ripples through global markets.

The uncertainty has also reached lawmakers, who are debating whether continued reliance on dollar distribution is sustainable amid rising economic risks. The US Federal Reserve has affirmed that it will continue to use dollars in its operations. However, following Trump’s policy shift, the US’s European trading partners are reassessing their dependence on the country.

European regulators have taken the step of prompting the Bank of England, the central bank responsible for maintaining monetary and economic stability, to urge lenders to assess the urgency of evaluating their dollar funding approach in their operations. Additionally, it has requested them to examine their reliance on the currency for short-term needs.

In light of the severity of the situation, a Britain-based global bank was recently asked to conduct an internal stress test on the possibility of a shutdown for the US dollar swap market. Richard Portes, an economics professor at London Business School and a former Chair of the Advisory Scientific Committee for the European Systemic Risk Board, mentioned that in a worldwide dollar funding crisis, the Fed may be reluctant to provide swaps due to concerns about a strong reaction from Trump. Portes explained that the Fed mainly focuses on keeping monetary policy independent.

He further urged the supervisors of foreign banks to encourage their banks to reduce their dollar exposures drastically. In response to Portes’s statement, the Prudential Regulation Authority, the supervisory part of the Bank of England, requested separate information from several banks concerning the situation, people with knowledge of the matter who wished to remain anonymous due to the confidential nature of the situation said.

When asked to comment, neither the Bank of England’s representative nor the global UK banks’ spokespersons that operate in banks such as HSBC, Standard Chartered, and Barclays responded to a request for comments. Contrastingly, a spokesperson from the White House responded to a request for comment. In a statement, the spokesperson mentioned that during President Trump’s administration, several markets and investors demonstrated strong confidence in the US dollar.

The spokesperson based the argument on the increase in bonds, stocks, and historic investments that have increased to trillions of dollars since Trump’s election day. Analysts express concerns about the US Fed’s financial stance. Earlier assessment of internal stress test on the US dollar revealed that euro zone banks required approximately one-fifth of the currency in their operations. The assessment also revealed that they highly rely on financial borrowing from short-term markets, which are unreliable in an economic crisis.

For example, European central banks have significantly borrowed funds from the US Federal Reserve. This is where the US dollar comes from, highlighting their reliance on the currency to fill their financial gaps. Interestingly, the US Fed has several loan programs that apply to the ECB, among other US partners. This aims to address the global US dollar shortage and prevent the effects of financial hardship from hitting the country.

Two reliable sources have highlighted that the US Fed never stopped indicating support for these safety precautions. Despite this, some sources suggest the possibility of the Fed shifting this stance. The BoE’s move to assess banks’ resilience to potential dollar shocks underscores the growing concerns over the stability of the global financial system in the face of Trump’s policies. The uncertainty surrounding the US dollar has prompted European regulators to take proactive measures, urging banks to evaluate their reliance on the currency and prepare for potential disruptions.