This week's secured overnight financing rate SOFR Futures shows that market expectations regarding the end of Federal Reserve Chairman Powell's term are pushing new bets on interest rate cuts. However, after Powell's departure, what keeps global central banks awake at night is not just interest rate policy, but the larger concern is the Federal Reserve's dollar swap agreements - the lifeline of the global financial system.
While investors are busy betting on Fed interest rate cuts, a more lethal issue is quietly brewing between European and Asian central banks: Will the Trump administration weaponize the dollar swap agreement, turning the last line of defense for global financial stability into a bargaining chip.
This week's guaranteed overnight financing rate SOFR futures show that expectations around the end of Fed Chair Powell's term are driving a new round of interest rate cut bets. A large number of traders are selling contracts for March 2026 while buying contracts for June of the same year—timed right around Powell's departure in May 2026. On Thursday, the trading volume of related contracts exceeded 0.06 million lots, setting a historic second-high.
The root of this speculation lies in Trump's long-standing criticism of Powell, as he believes Powell failed to cut rates earlier and faster. Although Trump recently stated he would not fire Powell, he made it clear he would nominate a successor, leading the market to generally expect that the new chairperson will rapidly execute Trump's rate cut intentions. However, after Powell's departure, what truly keeps global central banks awake at night is not only interest rate policy, but the greater concern is the Fed's dollar swap agreements— the lifeline of the global financial system.
The overlooked financial 'nuclear weapon'
In times of market panic, global investors go on a mad rush to buy dollars seeking safety, referred to as a 'dash for cash.'
Since non-U.S. entities cannot print dollars, it becomes necessary for the Fed to provide liquidity through swap agreements:
During the 2008 financial crisis, the Fed provided 583 billion dollars through swap agreements;
During the pandemic in 2020, this figure reached 450 billion US dollars, effectively curbing the financial crisis.
The issue is that the Trump administration seems determined to reshape the global financial order, prioritizing American interests. Vice President Pence has clearly stated, "I hate bailing out Europe." More worrying is the media report that the Pentagon announced this week it is reviewing submarine agreements with the United Kingdom and Australia, which means that agreements with allies are no longer sacred and inviolable.
Currently, the Federal Reserve maintains permanent dollar swap agreements with five central banks (European Central Bank, Swiss Franc, Japan, United Kingdom, Canada), and previously established temporary agreements with nine central banks, including Australia, Brazil, and Denmark.
Although Federal Reserve officials like Powell vigorously defend the value of swap agreements, the real concern lies after Powell's departure in 2026. Will the new Federal Reserve Board tightly interweave financial tools with geopolitical considerations?
More importantly, the U.S. Congress has final authority over the Federal Reserve, and in the context of populism and protectionism, there are worries that Congress is likely to revive its criticism of swap agreements from after 2008.
Global "Plan B": Establish a world reserve currency without the United States.
Faced with this unprecedented uncertainty, global central banks have quietly begun to build defensive works.
According to media reports, although European Central Bank Vice President Luis de Guindos publicly expressed trust in the Federal Reserve last month, the European Central Bank has requested banks in the region to report their vulnerabilities regarding dollar exposure.
Reports indicate that the influential CEPR think tank has published a call for central banks outside the United States to establish mutual assistance agreements in preparation for the worst-case scenario. The plan suggests that 14 major central banks utilize their total reserves of approximately $1.9 trillion to create a dollar liquidity pool independent of the Federal Reserve, coordinated by the Bank for International Settlements (BIS).
Although no officials have publicly supported this yet, emergency discussions are being held privately. Meanwhile, increasing Gold reserves and signing currency swap agreements with other countries have become tacit defensive measures among central banks.
In addition, reports quote a central bank official stating that the industry is discussing the 'Kindleberger Trap' — what happens when the dominant geopolitical power loses the ability or willingness to support the reserve currency.
Economist Charles Kindleberger warned that global unrest would erupt when a dominant hegemonic nation loses the ability or willingness to support the reserve currency, and its challenger fails to fill the vacuum in time — this mirrors the historical picture just before the British Pound was replaced by the Dollar between the two World Wars.
Clearly, the world has not yet slipped into that moment, but the seeds of unease have already been sown. Unless the White House can clearly support Powell's stance on maintaining the dollar swap agreement, this concern will only continue to fester.
Editor/joryn
