Bank of England ‘analysing’ end of dollar’s prestige
The Bank of England’s stability watchdog is assessing the potential impacts of the dollar’s recent slump after President Trump’s tariffs spooked investors.
Sam Woods, head of the Prudential Regulation Authority (PRA) and Bank deputy governor, suggested that the first month of Trump’s global trade war had diminished the dollar’s status as a safe haven currency.
He revealed that the Bank was looking into how the UK’s financial systems would cope with the drop in the dollar and important US assets.
“This has created a bit of a dent, I think, in the way the US is seen both by regulators and investors,” he told the Treasury Select Committee on Tuesday.
“We’re asking ourselves the question, what would happen if there was a more fundamental drop in appetite for dollar-denominated assets, or US assets, or Treasuries, or some version of that.”
“It is a difficult question to answer, but it is what we’re doing.”
The dollar tends to strengthen in times of global crises as investors typically regard it as a safe haven, but the onset of a global trade war and the President’s erratic swipes at the Chairman of the US Federal Reserve have damaged the US’ reputation.
The currency has plunged since April 2 and was on track for a drop of around 7.7 per cent, the biggest two-month drop in 23 years. It has strengthened slightly after reports that tariffs on China may be eased..
Treasury yields have also been volatile over the course of April.
The ten-year Treasury yield spiked from 4.2 per cent on April 2 to nearly 4.5 per cent in the middle of April before coming back down, while the S&P 500 looks set to continue its decline after two straight months of falls.
The Bank of England itself holds large dollar reserves in order to maintain financial stability.
Woods said he expected UK “cooperation” with the US to continue for the foreseeable future but added that recent tensions may have brought European allies closer.
“We have had very good relations with our colleagues in the EU, but I can tell you that one byproduct of these events is that the warmth is increasing quite considerably, so that is actually a good thing,” he said.
He also said the Bank was eagerly awaiting confirmation of Trump’s picks for three key financial regulators in the US that regulate key areas such as energy and securities.
“In the US we have had very strong cooperation for many years. I would expect that to continue, but… none of the three key heads of the agencies in the US have been confirmed, and until they are confirmed and we can engage properly, the jury is still a little bit out,” he said.
Woods also said that he was reassured the US would not abandon Basel rules that regulate the international banking sector.
The Bank has also not yet asked banks to report liquidity levels on a daily basis, Woods said. This measure is often enforced when markets are particularly volatile.
“What we’ve done is step up monitoring of the firms, which we always do in these situations. We’ve not taken it to the highest level,” Woods said.