Europe Explores Pooling Dollar Reserves as Fed Ties Come Under Political Strain

European financial officials are quietly debating whether to pool dollar reserves across multiple central banks in an attempt to reduce their exposure to the U.S. Federal Reserve’s liquidity backstops — a foundational piece of the global financial system that has come under new scrutiny as President Donald Trump’s policies unsettle longstanding norms.

The discussions, confirmed by five officials familiar with the early-stage talks, reflect a larger concern: that the dollar swap lines and lending facilities that underpin global stability could become politicized if tensions between Washington and its allies escalate. The matter has gained newfound urgency since Trump’s tariff shocks earlier this year rattled markets and raised alarms about dollar availability in Europe’s banking system.

The Fed’s dollar swap lines are designed as a safety valve for moments of stress, supplying central banks with the liquidity they need to keep funding markets functioning. But European officials increasingly fear the tools could be weaponized or restricted in a future crisis — not by the Fed itself, but through political influence exerted over the institution.

Those concerns peaked in April when Trump’s “Liberation Day” tariffs sent financing costs soaring and exposed cracks in banks’ dollar funding plans. Although Fed Chair Jerome Powell later assured global policymakers that access to dollar liquidity would not change, the episode sparked a fundamental reassessment of Europe’s strategic vulnerabilities.

As one official put it: “We have to prepare for a worst-case scenario where the reliance on the U.S. becomes a risk in itself.”

Searching for Alternatives — With Limits

Among the options now being explored is a pooled reserve structure where non-U.S. central banks contribute a portion of their dollars to a shared fund. In times of market stress, countries could draw on this pool instead of relying solely on the Fed.

But even proponents acknowledge significant drawbacks. The combined reserves of European central banks, while large, are nowhere near enough to replicate the Fed’s unmatched capacity as the issuer of the world’s reserve currency. During the pandemic in 2020, usage of the Fed’s swap lines peaked at $449 billion — far beyond what Europe could assemble on its own.

Pooling dollars could ease short-term stress, officials say, but it would not be enough to contain systemic turbulence. Political complications also loom large: questions over governance, contributions, and withdrawal rights make any agreement difficult.

The initiative remains at the technical and staff-analysis level, not yet escalated to top ECB policymakers. Still, several national central banks are quietly pushing for at least a partial alternative, officials said.

The concept mirrors Asia’s Chiang Mai Initiative, a $240 billion regional financial-safety arrangement created by ASEAN members alongside China, Japan, and Korea. But European officials warn their framework would face higher political friction and offer far less firepower.

A Fragile Equilibrium

Even as policymakers explore backup plans, most concede that the Fed’s swap lines remain irreplaceable. Their absence, one senior official said, could itself spark a global liquidity crunch: “Any hint the swaps might be discontinued would trigger stress immediately.”

The Trump administration insists the concerns are overstated. A White House spokesman said Trump “remains committed to the strength and power of the dollar,” while the Fed has declined to comment. Still, Trump’s willingness to challenge the central bank — including efforts to fire Fed Governor Lisa Cook — has left European officials uneasy about future policy stability.

Some regulators are preparing in other ways. European supervisors are pressing major banks to outline alternative dollar-funding strategies in Asia and the Middle East, and lenders are undergoing new stress tests designed to measure their resilience in a scenario where Fed liquidity becomes uncertain.

The question is raised “at every meeting,” one official involved in the talks said. Another added that concerns will intensify once Powell’s term expires in May, when Trump is expected to appoint a new Fed chair.

For now, officials emphasize that a loss of swap lines is not a “first-order risk.” But they also warn that the worst-case scenario — a geopolitical rift that disrupts access to the world’s base currency — is no longer unthinkable.

“We don’t expect the U.S. to cut Europe off,” one euro zone official said. “But part of our job is to prepare for the scenarios we hope never happen.”