A fragmented USD system, according to the global reinsurer Swiss Re, would create more unstable funding conditions, limit the ability of markets to share risks internationally, and place additional stress on liquidity in catastrophe and retrocession segments, where USD-based contracts remain the standard.
Swiss Re presents an even-toned view of current flows, noting that global capital movement is still strong even as US assets appear likely to command a more persistent premium and carry somewhat higher risks.
Despite efforts by global investors to rebalance exposures, the report finds that interest in US securities is set to continue, supported by robust equity valuations, active retail and foreign participation, and relative yield advantages.
Inflows recovered notably in May after substantial selling in April, and rolling annual figures have surpassed levels seen in recent years. Swiss Re adds that genuine alternatives are limited; the euro, despite its importance in reserves and cross-border payments, does not yet meet the institutional requirements needed to function as a complete replacement for the dollar.
The report notes that financial fragmentation could accelerate if new forms of protectionist behaviour emerge, especially where the dollar is used as a policy lever.
Capital restrictions or transaction taxes could gradually limit the appeal of US markets, while any decline in confidence in the independence of the Federal Reserve would weaken the global financial safety net during periods of stress. Strategic competition between the US and China, coupled with regulatory shifts in areas such as investment screening and data requirements, is further contributing to the segmentation of international financial activity.
Swiss Re underscores that the global system has faced acute USD shortages during past crises, including the events of 2008, the euro area debt episode, and the 2020 pandemic. With non-US banks holding more than USD 16 trillion in dollar-denominated assets, reliance on USD liquidity remains deep.
The report outlines a scenario in which the Federal Reserve opts not to extend swap lines in a crisis arising outside the US, prompting central banks to pool around USD 1.9 trillion in reserves as a substitute, an arrangement that would offer help but fall well short of the unlimited support only the Fed can provide.
For the re/insurance sector, Swiss Re concludes that deeper fragmentation would translate into more variable funding conditions, less efficient global risk distribution, and tighter liquidity in markets where catastrophe and retrocession coverage depend on USD contracts.
Firms may need to adjust reserve structures, reflect higher funding costs in pricing, and refine strategies designed to safeguard against sudden liquidity pressure. Over time, industry capital may gravitate toward jurisdictions with more consistent access to USD funding, reflecting the broader reorganisation of global financial flows.
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