And what about the lender of last resort?
20 JUN, 2025
By Philippe Waechter
The conflict between Israel and Iran is not having the expected effects. Although the price of oil has risen, it has not exceeded its level at the beginning of the year. The dollar has not served as a safe haven. Generally, in the event of a shock, investors rush towards the greenback, considering it a risk-free asset.
There have also been no significant repercussions on long-term interest rates in either the United States or Europe. In fact, it appears to be a minor regional shock, although how the conflict is resolved will have a significant impact. Investors, uncertain about the direction events will take, remain on standby.
Two observations
The dollar is depreciating, more affected by potential tariff announcements by Donald Trump, expected in July, than by the war itself. The former would have more lasting effects.
The price of oil has not skyrocketed. An article published this weekend in the FT suggested that the rapid increase in oil production announced by Saudi Arabia for June might explain this overly rapid decline. In such a scenario, the risk of a regional conflagration would be reduced.
What would happen in the case of a more severe shock? Two dimensions:
The first dimension would be a sharp and sustained rise in the price of oil. The effect would be quickly inflationary. Generally, central banks do not react. They don’t know what the oil price will be in three or six months. So taking a position on an increase in oil prices means risking being on the wrong path in 3 or 6 months if prices plummet. In 2022, the Fed raised rates due to scarcity, particularly of semiconductors. The ECB only intervened when the energy crisis took a persistent turn with the combined rise in gas and electricity prices. However, this would be a strong argument for the Fed not to rush to lower interest rates.
The second dimension concerns the lender of last resort. In the event of a negative shock, the Fed usually reactivates dollar swap lines so that no one is left without liquidity. Transfers of dollars, as a safe-haven currency, are then considerable, and the shock is cushioned. The coordination and complementarity of central banks then play their role. But what if US assets are no longer seen as risk-free? What if the dollar ceases to be a safe haven? The crisis that would follow the shock would be volatile and terribly unpredictable. The impact would be brutal and persistent. Moreover, could the Fed take on this role of lender of last resort under pressure from the White House and in a world that is now less cooperative? What role would the ECB and the Bank of China play? The cards would be reshuffled, with new rules to invent and write.
