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By Mike Dolan

LONDON, May 12 (Reuters) - Kevin Warsh is poised to take the helm of the Federal Reserve with a mission to clip the wings of a central bank he thinks strayed too far into politics. Many countries fear that just gives U.S. politicians more room to use financial tools as a cudgel.

Nominated in January by U.S. President Donald Trump to succeed Jerome Powell as chair, Warsh is widely expected to win Senate confirmation before Powell's term ends on May 15.

His recent confirmation hearing dug deep into views on Fed independence and a controversial preference for slashing the Fed's $6.7 trillion balance sheet. But there was one twist in his testimony that rankled many of his future counterparts around the world.

Since Trump's return to the White House last year, concern has grown in Europe and elsewhere about the administration's willingness to weaponize trade and even military support to extract political and financial concessions from allies and foes alike.

In finance, perceived threats to Fed independence - Powell himself flagged the issue after a criminal case was brought against him earlier this year - have typically been linked to a possible rethink of the Fed's currency swap lines. Those lines have provided dollar liquidity backstops to allied economies for two decades.

The fear is simple. If the Trump administration is willing to politicize long-standing trade agreements and transatlantic military alliances, then central banks elsewhere need to step up contingency plans for a possible removal of Fed overseas dollar funding lines too.

Like tariffs, those lines could also serve as bargaining chips, and other G7 central banks need to factor that in.

On the face of it, Warsh's take on Fed reform sounds more nuanced than that.

But many see his very appointment by a president demanding lower interest rates - and who has publicly threatened central bankers who refuse - as undermining his own argument for balance sheet reduction as a way of distancing the Fed from politics.

His hearing left many overseas finance chiefs just as wary about the stability of those dollar backstops as they were before his nomination.

In response to a question from Democratic Senator Elizabeth Warren about whether the Fed could disagree with Treasury on swap lines, or act independently, Warsh was cryptic in his written answer.

"Fed independence is at its peak in the operational conduct of monetary policy," Warsh wrote. "Fed officials are not entitled to the same special deference in areas affecting international finance, among other matters. In those matters, the Fed will work with the Administration and with Congress."

The word used by one overseas official to describe that statement was "troublesome."

'TROUBLESOME'

Others have been warning for months that the Fed crisis tool could be sharpened for political purposes - even if dropping standing facilities altogether in favor of Treasury-sanctioned bilateral funding lines is the direction Warsh appears to indicate.

Making liquidity backstops conditional on political approval may or may not make sense in Washington. But it would upend the working assumption of financial firms and central banks overseas about the availability of dollar funding in a sudden shock - the kind seen in the 2008 banking collapse or the COVID pandemic in 2020.

This funding vulnerability may simply be a function of the dollar's dominance and ubiquity across world finance and trade. But any U.S. unwillingness to resolve exposure to sudden dollar droughts could accelerate attempts to reduce reliance on the currency over time.

At the very least, monetary authorities that can no longer automatically rely on these emergency spigots need to intensify stress-testing and plan for alternatives.

Fed swap lines with Canada and Mexico stem from the 1990s and were expanded to G7 and other central banks around the 2008 crash. The current standing dollar swap lines date from 2013, adjusted during the pandemic and the regional banking squeeze of 2023.

Most standing lines were put in place "until further notice" but appear to be reviewed and voted on annually, as Fed meeting minutes from May 2025 indicate.

Meanwhile, Treasury's involvement in bilateral dollar swap lines - drawn from its own more limited stabilization fund - appears to have grown over the past year, notably in Argentina and, more recently, around a request from the United Arab Emirates.

The upshot could be that removing the Fed's automatic, largely technocratic international supports - in the name of depoliticizing the central bank - could end up politicizing international finance and crisis management like never before.

That tension may land on Warsh's desk at his very first meeting.

(The opinions expressed here are those of Mike Dolan, a columnist for Reuters.)

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