At SecFin Solutions, we monitor market signals closely to help clients navigate an increasingly complex financial landscape. A key concern we’ve observed recently is growing unease around dollar liquidity in European markets. With 17% of eurozone bank funding sourced in U.S. dollars, this dependency is coming under strain as geopolitical tensions rise. A number of EU institutions are now warning that dollar access could be weaponised in future trade disputes — a risk that feels both plausible and urgent.
This blog explores that risk in depth, unpacking the structural vulnerabilities of Europe’s dollar dependence and the strategic implications of relying on a currency increasingly subject to political leverage.
The global financial system’s reliance on the U.S. dollar has long been a cornerstone of international trade and investment. However, escalating geopolitical tensions and shifting U.S. policy priorities are exposing vulnerabilities in this system, particularly for European institutions dependent on dollar liquidity. This blog post explores the interplay between geopolitics and dollar funding, highlighting risks, structural dependencies, and potential systemic consequences.
European banks and corporations remain heavily reliant on dollar funding, despite the euro’s role as a regional reserve currency. Key insights reveal:
17% of eurozone banks’ funding is sourced in U.S. dollars, with greenback-denominated assets accounting for €1.6 trillion in repo markets alone 10 12.
25% of European banks lack adequate dollar reserves to cover their exposures, per a 2025 European Banking Authority (EBA) report 3. This shortfall leaves institutions vulnerable to liquidity crunches during market stress.
This dependency stems from the dollar’s dominance in global trade (40% of transactions) and its role as the primary currency for commodities, derivatives, and debt issuance. Yet, this reliance is increasingly seen as a strategic liability amid geopolitical shifts.
Recent U.S. tariff escalations and protectionist policies have raised concerns that dollar access could become a bargaining chip in trade negotiations. For example:
EU firms fear that dollar liquidity restrictions could be imposed to pressure European compliance with U.S. trade demands 12.
A senior risk officer at a European wealth manager noted scenarios where “all U.S. dollars have to be held in U.S. banks,” forcing institutions to reassess third-party dependencies 12.
Such measures could disrupt European banks’ ability to refinance short-term dollar debts, potentially triggering a liquidity crisis.
The Federal Reserve’s dollar swap lines—a critical lifeline during crises—are under scrutiny. European officials have privately questioned whether the Fed would maintain this support under a Trump administration, given:
Political pressure on Fed independence: Concerns that the U.S. executive branch could interfere with swap line allocations to advance geopolitical goals 2 10.
Historical precedents: During the 2020 pandemic, the Fed restricted swap lines to 14 central banks, excluding economies like Turkey and China 4.
If the Fed withholds support, the European Central Bank (ECB) would face unprecedented challenges in backstopping dollar liquidity, constrained by EU treaties that limit its mandate 2.
Swap lines allow central banks to exchange local currency for dollars, stabilising markets during crises. However:
Asymmetric power dynamics: The Fed alone controls global dollar liquidity, granting the U.S. outsized influence over financial stability 4 7.
ECB’s limited tools: The ECB cannot directly issue dollars, forcing reliance on Fed cooperation. In a crisis, this could lead to competitive currency devaluations or fire sales of dollar-denominated assets2 10.
Research from Columbia University highlights a symbiotic relationship between military power and currency dominance 7:
The dollar’s status as a “safe asset” is reinforced by perceptions of U.S. military supremacy, which assures investors of its stability during conflicts.
Heightened geopolitical tensions (e.g., Russia-Ukraine war) often increase demand for dollar assets, paradoxically strengthening the U.S. financial position even as global risks mount 7.
For Europe, this creates a paradox: reliance on the dollar is both a security blanket and a source of vulnerability.
A sudden loss of dollar access could:
Force European banks to sell dollar assets at distressed prices, amplifying market volatility.
Disrupt trade financing, particularly for energy imports (e.g., oil and gas priced in dollars) 11.
While a full-scale shift away from the dollar remains unlikely, trends are emerging:
Euro as a regional hedge: The ECB has expanded euro swap lines to mitigate dollar dependence, though capacity remains limited 4.
Renminbi internationalisation: China’s efforts to promote its currency in trade settlements could fragment the global system, though structural barriers persist 4 11.
Strengthening euro-denominated markets: Expanding the ECB’s role in euro liquidity provision and harmonizing EU financial regulations.
Stress-testing dollar exposures: The EBA has urged banks to align foreign currency assets with liabilities or adopt hedging strategies3.
Geopolitical tensions and dollar funding are inextricably linked, creating a precarious balancing act for European institutions. While the dollar’s dominance is unlikely to wane soon, its weaponization in trade conflicts or political disputes poses acute risks. For policymakers and financial leaders, the path forward involves diversifying funding sources, reinforcing regional financial infrastructure, and preparing for a world where the dollar’s privilege is no longer absolute. As one risk officer starkly warned: “The unthinkable is becoming worth thinking about.” 12
At SecFin Solutions, we help financial institutions stress-test their funding models, identify currency mismatches, and prepare for tail-risk scenarios — like sudden restrictions on dollar access. Whether through targeted consulting or specialist training, our goal is to equip leaders and treasury teams with the tools to stay resilient in a shifting geopolitical landscape.
If your organisation is exposed to dollar funding or involved in cross-border financing, now is the time to act.
🔍 Explore our consulting services: www.secfinsolutions.com/consulting
🎓 View our latest training courses: www.secfinsolutions.com/training
Let’s start a conversation about how your firm can adapt to a future where dollar privilege may no longer be a given.
At SecFin Solutions, Glenn Handley epitomises expertise and innovation in global finance and management consulting.
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