Unlock the editor’s summary for free
Roula Khalaf, editor of the FT, selects her favorite stories in this weekly newsletter.
In 1857, the Bank of Austria loaded 10mn ounces of silver on a train and sent it to Hamburg. The reason? The banks of the city were about to collapse, having been left without reservations.
Then Austria sent that “silver train” to provide liquidity. And 30 years later, the French Central Bank did the same with a golden boat, during the ship crisis in Great Britain.
Could that help be necessary again, in a dollar form of the 21st century? It is a question that now refers silently among the European and Asian central bankers, in relation to the topic that was once arcane of the central bank’s dollar exchange lines. Investors should pay close attention.
The reason is that these exchange lines have been considered a central pillar of the global financial system in recent decades, since they have allowed the main central Asian and European banks to obtain dollars from the United States Federal Reserve in a crisis. This is crucial because in times of market stress there is usually a “career for cash”, that is, a fight for dollars, given the role of Greenback as a reserve currency.
However, non -American entities cannot print those dollars, so it is possible that it cannot meet demand. Thus, during the financial crisis of 2008, the FED activated about $ 583 billion in exchange lines for non -American central banks, to allow dollars to flow to commercial banks.
He did the same during the Eurozone crisis and then provided $ 450 billion during the Covid pandemic in 2020, a movement that suffocate financial infection, according to Richmond’s Fed.
But doubts are now dragging on the reliability of that security network. After all, the administration of US President Donald Trump seems determined to restore the world’s financial and economic order and put American interests first. JD Vance, the vice president, has observed that “he only hates[s] rescue Europe ”.
These are allies, in other words, they no longer seem sacred. Just look at this week’s revelation that the pentagon is reviewing its underwater pact with the United Kingdom and Australia.
Fed officials, on the other hand, vehemently deny that the dollar swap system can echo this underwater story. In fact, Jay Powell, president of Fed, emphasized his merits during a speech in Chicago in April.
But what worries some outside the US. It is what could happen when Powell leaves in 2026. The Fed currently has permanent dollar exchange facilities with five central banks (in the Eurozone, Switzerland, Japan, Great Britain and Canada) and previously created temporary facilities for others, including Australia, Brazil and Denmark, which have expired.
It is not clear if those last facilities would be restored in a crunch and, if so, what “price.” If the Fed offered swaps to the Danish Central Bank, say, would Trump demand concessions in Greenland? Nor is it clear if Washington could join conditions to permanent exchange lines. After all, Scott Besent, secretary of the Treasury, Views Finance, Military, Trade and Tech, as they are deeply intertwined.
Then there is the Congress, which has the highest authority over the Fed. After the 2008 crisis, there were some bipartisan criticisms of the Swaps line congress, that the officials fed mostly struggled to indicate that a global financial panic would have harmed the United States. But this criticism could easily return, particularly Trump’s protectionist and populist instincts.
Hence the need for Europe to reflect on that “silver train” of 1857. Last month, Luis de Guindos, vice president of the European Central Bank, insisted that the ECB was still sure that the Fed would keep the exchange lines. But recently it was learned that the ECB has asked its banks to denounce vulnerabilities around its exhibitions to the dollar.
And an article published by the influential thought group of CEPR has now asked the non -American central banks to create a mutual pact to prepare for the worst case. The idea would be that 14 central banks use their estimated holdings of $ 1.9TN in dollars to extend the liquidity with each other, if the Fed withdrew, in coordination with the bank for international agreements.
No central banker has publicly supported this idea. But some tell me that many contingency plans are being discussed. And in the meantime, other defensive steps, such as increasing their gold purchases and, in the case of smaller countries, reducing exchange agreements with China are silent.
“There is a debate about Kindleberger’s trap,” one tells me, referring to economist Charles Kindleberger warning that turbulence explodes when a dominant geopolitical power loses the ability or desire to support a reserve currency, without its ascending rival being introduced into breach. (This is what happened in the years of delivery before Sterling was replaced by the dollar).
We are not emphatically at that moment of Kindleberger now, and we must expect it to never arrive. But the key point is this: unless the White House clearly supports Powell’s comments about the need to preserve dollar exchange lines, restlessness will grow. So let’s trust Besent, as a fan of financial history, recognizes this and acts. If not, the price of gold will continue to increase.
Gillian.tett@ft.com
