The Fed’s crisis tool can be used as a weapon, says a Harvard economist

A key tool used by the US central bank to stabilize global financial markets in times of crisis could be deployed by the Trump administration, Kenneth Rogoff, a former chief economist at the IMF, said when asked if that was a possibility.The Federal Reserve’s swap lines, which lend dollars to other central banks during periods of market turmoil, act as a crucial lifeline and were deployed heavily during the global financial crisis nearly two decades ago.

Concerns about erratic U.S. policies have grown since President Donald Trump returned to power last year, with his tariff threats against European allies shaking long-held assumptions.Rogoff, who teaches at Harvard University, said the government could potentially use swap lines as leverage.

DOLLAR UNDER PRESSURE

“The weaponization of the dollar is not new, it has been happening since the 1950s, but I would not be surprised if the Trump administration used this weaponization, for example with barter lines,” he told Reuters during a visit to London.

“For example, they could use it against Mexico if there were disagreements about tariffs.” Already last year, Trump’s sweeping tariffs sparked debate among European officials about whether to build an alternative to Fed backstops by pooling dollars from non-U.S. central banks to reduce dependence on Washington.

The US benefits from enormous global demand for its assets, including its currency – a long-standing advantage often described as ‘exorbitant privilege’.

More recently, analysts have been watching geopolitical developments surrounding Argentina after the US extended a lifeline to the country that already had an $18 billion swap deal with Beijing.

However, the rhetoric about possible tensions between the US and China related to their respective aid instruments did not escalate. US Treasury Secretary Scott Bessent said late last year that Washington had made money from the scheme.

Asked about Europe’s efforts to boost its resilience, Rogoff said: “Swap lines have more meaning once the back-office infrastructure is developed.”

The dollar has come under renewed pressure after Trump said on Tuesday that the currency’s value was “great” when a reporter asked him if he thought its value had fallen too much.

Rogoff said the dollar’s long decline predated the Trump administration’s desire for a weaker currency.

Since Trump came to power in January last year, the dollar has lost about 10% against a basket of major currencies and is near its lowest level in four and a half years.