The US government is gradually rolling back its punitive tariffs. The realization that they do more harm than good came late, but it came nonetheless. Does this mean that economic reason will prevail in the end? One can only hope so. But if this US administration is known for one thing, it is its unpredictability. In other words, anyone who buries decades of free trade with the rest of the world in a matter of days is capable of just about anything, Commerzbank's Head of FX and Commodity Research Thu Lan Nguyen notes.

Dollar dominance seen as geopolitical weapon

"Last week, a Reuters article made the rounds reporting that EU officials are currently exploring alternatives to the existing Fed-backed dollar funding lines. The idea is that central banks outside the US would join forces and 'pool' their US dollar reserves so that they could draw on them in times of stress in the financial system. The concern seems that the Fed might terminate existing swap lines with some central banks, including the ECB. These are intended to provide sufficient USD liquidity outside the US in times of crisis, when demand for US dollars usually rises."

"These considerations show us, on the one hand, that the US administration has obviously created such a strong foreign policy rift that other countries are now questioning any dependence on the US and are sparing no effort to reduce it wherever possible. On the other hand, it shows once again that the supremacy of the US dollar in the global financial system is seen as a dangerous weapon. And rightly so, because US Treasury Secretary Scott Bessent, like his predecessors, had committed himself to a 'strong dollar policy' for good reason. This does not mean a policy of a strongly valued dollar, but rather a currency with a strong global reach. This is precisely what allows the US government to enforce extraterritorial claims."

"In this respect, the EU officials' considerations are not unfounded. However, this 'US dollar pool' is hardly the solution. Without having to look up how large the potential pool could be, it is certain that it will not be sufficient in the event of a crisis. This is because every market participant knows, of course, that the funds are finite, which reduces their effectiveness as a backstop. I would even go so far as to say that it increases the risk of spillover effects: if a central bank loses its USD reserves because it lends them to another, it becomes vulnerable. The reason why the Fed's swap lines are so effective in alleviating fears of a USD shortage is that everyone knows that the Fed can spend an infinite amount of USD."