Deutsche Bank has raised concerns about the potential decline of the US dollar’s dominance due to decreasing trust in US institutions. This is attributed to doubts regarding the Federal Reserve’s reliability in providing liquidity support during market stress, specifically referencing dollar swap lines.
The swap and forward market is immense, valued at nearly $100 trillion in 2022, and primarily involves US dollar transactions. During financial crises, such as the COVID-19 pandemic, banks often retract swap lines, which can lead to market upheaval and contribute to instability in US assets.
Shift Towards Dedollarization
Discussions within the European Central Bank about reducing reliance on the dollar indicate a shift towards de-dollarization. The absence of swap lines with the Fed for countries like China and Russia has prompted them to bolster their financial systems, thereby increasing the possibility of a broader move away from the dollar in the global financial context.
Consequently, fears about the Fed’s commitment may accelerate efforts among countries to lessen their dependence on the US financial system, ultimately weakening the dollar’s global role. Following these developments, gold prices reached a record high, reflecting a growing push against the dollar.
What we’re seeing here is the early signals of a structural shift in how global finance regards the dollar, no longer simply as a neutral mechanism of exchange but rather as something contingent — on politics, on policy, and on perception. With the Federal Reserve being questioned over its consistency in extending liquidity, particularly through swap lines, a cornerstone of market confidence has begun to wobble.
This matters in practical terms. Those of us dealing in forwards and interest rate swaps are acutely aware that the dollar underpins liquidity across multiple geographies. When gaps appear in the certainty of dollar funding — especially during periods of stress — pricing spreads widen, hedging grows more expensive, and liquidity mismatches can ripple outward. What we took as a given becomes a variable.
Recalibrating Risk Assumptions
From a risk management perspective, this should prompt a reexamination of funding assumptions used in models. If swap lines are not universally accessible, then the cost of assuming they will be could be severe. Liquidity premiums may need to be recalibrated. Synthetic dollar exposure could also become more volatile, particularly where local currency funding is less reliable or where convertibility restrictions lurk in the background.
On a macro level, we’ve seen policymakers — particularly in Europe — begin to float conversations that not long ago would’ve seemed peripheral. Shifting away from dollar dependency, even gradually, implies changes in reserve composition and in the behaviour of central banks under stress. From our vantage point, this might affect how currency basis risk is priced, especially for entities hedging multi-year flows.
The recent uptick in gold — hitting new highs — reads not just as a commodity move, but as a positioning signal. When trust in fiat issuers sees cracks, gold becomes more than a store of value. It’s a hedge against instability in the forex and rates complex. It becomes, for many, the alternative denominator in contracts where the long-standing predictability of the dollar is no longer taken for granted.
In the weeks ahead, monitoring durational flows rather than merely intraday vol will be key. With forward markets as large as they are, small shifts in sentiment can amplify quickly, especially when liquidity providers become more cautious. We should expect some repricing of long-tenor hedging costs and potential collateral adjustments depending on counterparties.
Hesitation at the institutional level, particularly from those we typically look to during moments of stress, means less of a backstop is assumed — and more gets priced into the curve. Swaptions and long-dated spreads may begin to incorporate not just rate views, but trust premiums. That’s something we haven’t seen in recent cycles with such clarity.
If we’re positioned in exposures reliant on USD liquidity, it’s now a situation worth hedging not just in rate terms, but in accessibility terms. Resilience should no longer be measured solely by balance sheets, but by assumptions around who will step in — and under what conditions.
For cross-currency bases, especially in stressed jurisdictions, this new tone could become part of the narrative. Not just in pricing terms, but in documentation, in collateral standards, in covenant triggers. We’re seeing the early signs. What’s often quietest before the shift is the terms on which counterparties settle risk.
