How to Live Without the Dollar: Modeling a Catastrophe

EUR/USD

Key zone: 1.1550 - 1.1650

Buy: 1.1650 (on strong positive fundamentals) ; target 1.1800-1.1850; StopLoss 1.1580

Sell: 1.1550 (on a pullback after retesting the 1.1600 level) ; target 1.1350; StopLoss 1.1620

The largest European asset manager DWS warns: if the U.S. – more precisely, the Federal Reserve – decides to restrict access to dollar liquidity, the consequences would be devastating. Such a move would hit the entire global financial system, primarily emerging markets that critically depend on dollar funding.

Speaking at an ECB conference, Jerome Powell promised not to change the rules for providing dollar liquidity to foreign central banks. Yet European regulators have long been discussing the creation of an alternative to dollar-based funding mechanisms. The idea is simple: pool non-U.S. central banks’ dollar reserves to reduce dependence on Washington. Trump’s return to power only accelerated the discussions – Europe does not want to become hostage to U.S. monetary policy again.

How could access to the dollar be restricted?

A complete ban on the dollar is unlikely, but selective or temporary restrictions are absolutely possible. Washington has many tools of pressure.

Sanctions and bans on dollar settlements

• Blocking banks through OFAC lists;
• Prohibiting operations via correspondent accounts in U.S. banks;
• Restricting access to dollar clearing systems (CHIPS, Fedwire).

Making dollar funding more expensive

• Tightening access todollar credit lines for foreign banks;
• Revising swap-line conditions between the Fed and the ECB, BOE, BOJ.

Regulatory and legal pressure

• Secondary sanctions on intermediaries bypassing restrictions;
• Pressure on global infrastructures – clearing houses, depositories, settlement systems.

Even partial application of these tools would create systemic global risk, capable of triggering a financial chain reaction.

The dollar is the core of the global system. Today it represents:

• 58% of world FX reserves,
• 88% of all FX transactions (USD appears in almost every second currency pair).

Almost all global credit, trade finance, and derivatives markets are tied to the USD. The BIS estimates hidden dollar liabilities in FX-swaps and forwards at trillions of dollars – an “invisible” debt that could surface with any liquidity disruption.

Even if contracts are settled in EUR, GBP, or JPY – most of the hedging still goes through the dollar.

This is why any restriction on dollar flows inevitably affects all major currencies.

If the dollar weakens: where should traders run?

If you are not ready to flee into gold or equities, it’s worth shifting to cross pairs without USD:

• EUR/JPY – the key “Europe–Asia” corridor;
• EUR/GBP – balance between London and Brussels;
• GBP/JPY – a mix of risk appetite (GBP) and safe-haven dynamics (JPY).

With gradual dedollarization, liquidity in these pairs increases, and the information flow stays transparent and accessible. They can be traded with standard techniques (mean reversion, breakout strategies, volatility and liquidity analysis).

We will cover detailed tactics for trading in an environment of restricted dollar liquidity in a separate article.

For now, markets remain oversupplied with dollars, and retail traders face no limitations – but looking for alternatives to USD dependence is already essential. Any limitation on access to the dollar would become a global financial shock – and those who learn to survive without it in advance may end up among the winners.

So we act wisely and avoid unnecessary risks.

Profits to y’all!