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THE EURODOLLAR SYSTEM
Part 1: Origins & Mechanics
Part 2A: Crisis Patterns (1997 & 2008)
Part 2B: The Pattern Completes (2011, 2019, 2020)
► Part 3: Current Vulnerabilities (You are here)
Part 4: Alternatives & Endgame
INTRODUCTION: THE SYSTEM TODAY
Parts 1 and 2 documented how the Eurodollar system was architected and why it repeatedly fails. Now we examine the most strategically critical question:
Where is the Eurodollar system fragile RIGHT NOW, in December 2025?
This is not historical analysis—this is forward-looking risk assessment. For traders, risk managers, policymakers, and anyone exposed to global dollar markets, understanding current vulnerabilities is essential. The next crisis won't announce itself with sirens. It will emerge from stress points that exist today, waiting for a trigger.
We examine:
- Post-2020 landscape: What's changed (and what hasn't)
- The persistent basis problem: Structural warning sign
- Geographic stress points: Japan, China, Emerging Markets
- Regulatory constraints: Why banks still can't intermediate effectively
- The Treasury-Eurodollar doom loop
- Early warning indicators: What to watch
- Trigger scenarios: What could ignite Crisis #6
THE POST-2020 LANDSCAPE: WHAT'S CHANGED?
The Official Narrative: "The System Is More Resilient"
Following the March 2020 crisis, central banks and regulators claimed to have strengthened the system:
- Standing swap lines: Already permanent (since 2013), proven effective in 2020
- Standing Repo Facility (SRF): Created July 2021, provides permanent domestic repo market backstop
- FIMA Repo Facility: Created March 2020, allows foreign central banks to repo Treasuries for dollars
- Bank capital buffers: Maintained at elevated post-2008 levels
- Stress testing: Regular assessments of bank resilience
The claim: More permanent Fed support + higher bank capital = greater system resilience.
The Architectural Reality: Fragility Compounded
What actually changed:
1. More Fed Support, Not Less Fragility
The "solutions" formalized Fed's role as permanent backstop without addressing underlying architecture. This creates MORE moral hazard: entities know Fed will intervene, encouraging continued offshore dollar leverage.
2. Synthetic Dollar Funding Continued Growing
FX swap markets didn't shrink post-2020—they continued expanding. Recent research (Khetan 2024) shows global banks' synthetic dollar borrowing remains concentrated in overnight-to-one-week tenors, primarily against EUR, JPY, and CHF. The off-balance-sheet leverage that creates "hidden debt" is larger now than in 2020.
3. Regulatory Constraints Returned
The temporary SLR exclusion (April 2020-March 2021) that exempted Treasuries and reserves from leverage calculations expired. Banks once again face binding balance sheet constraints that limit intermediation capacity during stress.
4. Geopolitical Fragmentation Accelerated
Russia sanctions (2022-present) demonstrated dollar system weaponization. China's de-dollarization efforts intensified. This creates bifurcation risk: entities outside Western alliance may reduce dollar reliance, but those remaining become MORE dependent on fragile Eurodollar plumbing.
VULNERABILITY #1: THE PERSISTENT NEGATIVE BASIS
Why This Matters: The Basis That Shouldn't Exist
The cross-currency basis swap is the clearest structural indicator of Eurodollar system stress. According to covered interest rate parity (CIP), borrowing dollars directly should cost the same as borrowing another currency and swapping into dollars via FX swap. Any deviation should be arbitraged away instantly.
Reality since 2008: The dollar cross-currency basis has been persistently negative for major currency pairs (EUR/USD, JPY/USD, CHF/USD, GBP/USD).
A negative EUR/USD basis of -50 basis points means: Borrowing euros and swapping into dollars (synthetic dollar funding) costs 0.50% MORE annually than borrowing dollars directly.
Why this is architecturally significant: This "arbitrage opportunity" persists because arbitrageurs (primarily banks) face regulatory constraints that make exploiting the basis expensive. Post-2008 Basel III leverage ratios penalize balance sheet expansion. Even "risk-free" arbitrage requires balance sheet space, which costs capital under SLR requirements.
Current State (2024-2025): The Basis Persists
Recent research findings (2023-2024):
- Term structure exists: Basis deviations are larger at longer maturities, indicating structural constraints at different points on the curve
- Regulatory and risk factors dominate: Intermediary constraints (SLR), risk aversion, and policy decisions explain persistence more than transitory factors
- Corporate dollar funding drives long-term basis: Corporations' demand for hedging dollar liabilities creates structural pressure at longer tenors
- Bank wholesale funding constraints matter: When money market funds withdraw from European banks (reducing cheap wholesale dollar funding), European banks increase synthetic dollar borrowing via FX swaps, widening the basis
CME Group launched EUR/USD Cross-Currency Basis futures (February 2025): The fact that a major exchange created futures contracts for the basis indicates market recognition that deviations are permanent, tradable features—not temporary anomalies to be arbitraged away.
What The Persistent Basis Reveals
A negative cross-currency basis means synthetic dollar funding is systematically more expensive than direct funding. This reveals:
- Structural dollar funding shortage: Demand for synthetic dollars exceeds arbitrage capital available to supply them
- Regulatory constraints binding: Banks can't costlessly exploit the basis because balance sheet expansion triggers capital requirements
- Hidden leverage: The size of the basis indicates the scale of off-balance-sheet synthetic dollar positions
- Crisis predictor: When the basis widens sharply (as in March 2020), it signals acute dollar funding stress
For market participants: Monitor EUR/USD, JPY/USD, CHF/USD cross-currency basis daily. Widening = increasing stress. Rapid widening (basis moving from -30bp to -100bp+ in days) = imminent crisis.
VULNERABILITY #2: GEOGRAPHIC STRESS POINTS
Japan: The Biggest Synthetic Dollar Borrower
Why Japan is critical:
- Scale: Japanese banks are among the largest synthetic dollar borrowers globally via FX swaps
- Carry trade unwind risk: Japanese investors (pension funds, insurance companies, retail) have borrowed yen at near-zero rates to buy dollar assets for decades. If yen strengthens or dollar assets decline, mass unwinding creates dollar funding demand spike
- BOJ policy pivot risk: If Bank of Japan shifts from ultra-loose policy (yield curve control), yen could strengthen sharply, triggering carry trade liquidation
- Aging demographics: Japan's institutions need to repatriate dollars as population ages and pension/insurance payouts increase
The March 2020 evidence: Bank of Japan drew $226 billion from Fed swap lines at peak—nearly 50% of total swap line usage, despite Japan not being in a domestic financial crisis. This reveals the scale of Japanese institutions' structural dollar funding dependence.
China: The Opaque Giant
Why China is a wildcard:
- Massive dollar debt: Chinese corporates and banks hold substantial dollar-denominated debt, much via offshore entities (Hong Kong)
- Opacity: True scale unknown due to off-balance-sheet positions and incomplete reporting
- Real estate sector stress: Property developers' dollar bonds (Evergrande, Country Garden, others) have defaulted. Remaining exposures create contagion risk
- Capital controls: Make dollar funding less flexible; can't easily access offshore markets during stress
- Geopolitical risk: Taiwan conflict or intensified sanctions could cut Chinese entities off from dollar funding markets
The strategic dimension: China holds ~$3 trillion in forex reserves, largely US Treasuries. A crisis forcing China to sell Treasuries to obtain dollars for entities needing funding would spike Treasury yields and widen Eurodollar basis simultaneously—amplifying both stresses.
Emerging Markets: The Recurring Vulnerability
EM dollar debt at record levels:
| Region | Dollar Debt Exposure | Primary Risk |
|---|---|---|
| Latin America | Sovereign + corporate dollar bonds | Dollar strength, commodity prices |
| Emerging Asia | Corporate dollar debt, carry trades | Fed policy tightening, currency weakness |
| Eastern Europe | Dollar loans, sovereign debt | Geopolitical risk, sanctions spillover |
| Africa | Sovereign Eurobonds | Debt sustainability, IMF programs |
The 1997 lesson unlearned: Despite Asian Financial Crisis demonstrating the dangers of short-term dollar borrowing with currency mismatches, emerging markets have accumulated even larger dollar debts. Many EMs have better reserve buffers and more flexible exchange rates than 1997, but absolute dollar debt levels are higher.
The cascade mechanism: EM crisis → dollar strength → higher debt service costs → more EM stress → capital flight → more dollar demand → further dollar strength. This feedback loop can rapidly become self-fulfilling.
VULNERABILITY #3: REGULATORY CONSTRAINTS ON INTERMEDIATION
The SLR Problem: Still Binding
We documented in the 2019 repo crisis (Case Study #001 and Part 2B) how the Supplementary Leverage Ratio constrains bank intermediation. Post-2020, this vulnerability remains:
Current SLR status:
- Temporary relief expired March 2021: The COVID-era exemption excluding Treasuries and reserves from SLR calculations was not renewed
- Enhanced SLR (5-6% for GSIBs) still binding: Major US banks (JPMorgan, Citi, Bank of America) that intermediate global dollar flows face strict leverage limits
- Quarter-end effects persist: Banks still reduce market-making and intermediation near quarter-ends to minimize reported assets for regulatory calculations
- No permanent reform: Despite industry lobbying and Fed officials suggesting SLR recalibration might be appropriate, no legislative or regulatory changes have occurred
Why this matters for Eurodollar markets: The same banks constrained by SLR domestically are the primary intermediaries in FX swap markets and correspondent banking for offshore dollar flows. When domestic balance sheet capacity is constrained (by SLR), it reduces capacity for offshore dollar intermediation.
The Basel III "Endgame" Uncertainty
Proposed Basel III finalization (US implementation pending):
US regulators have proposed implementing the final Basel III standards ("Basel III Endgame"), which would:
- Increase risk-weighted capital requirements for certain activities
- Expand scope of banks subject to stricter requirements
- Modify market risk and operational risk frameworks
Industry response: Banks argue these changes would significantly reduce market-making capacity, particularly in Treasuries and FX markets. Fed Vice Chair Barr proposed revisions in September 2024 to reduce capital increase impact, but final rules remain uncertain as of December 2025.
The uncertainty itself is destabilizing: Banks don't know what capital requirements they'll face, making long-term commitments to market-making and intermediation difficult. This reduces system resilience.
Why Constrained Intermediation Creates Fragility
The intermediation paradox:
Post-2008 regulations aimed to make banks safer by requiring more capital and limiting leverage. But these same regulations constrain banks' ability to intermediate during stress—exactly when intermediation is most needed.
The result:
- Banks safer individually (more capital, less leverage)
- System more fragile collectively (less intermediation capacity during stress)
- Fed forced to permanently backstop markets that banks no longer can
This is why we have Standing Repo Facility, standing swap lines, FIMA Repo Facility—all permanent mechanisms compensating for reduced private sector intermediation capacity.
VULNERABILITY #4: THE TREASURY-EURODOLLAR DOOM LOOP
How Treasury Market Fragility and Eurodollar Stress Amplify Each Other
One of the most dangerous current vulnerabilities is the interconnection between US Treasury markets and Eurodollar funding markets. March 2020 revealed this doom loop: entities scrambling for dollars sold Treasuries (supposedly the most liquid, safe asset), but Treasury market liquidity evaporated precisely when needed most.
The Mechanics of the Doom Loop
Stage 1: Dollar Funding Stress Emerges
- Trigger event (EM crisis, geopolitical shock, policy divergence) creates dollar funding demand
- FX swap basis widens as entities seek synthetic dollars
- Some entities can't access FX swaps or find them too expensive
Stage 2: Treasury Fire Sales Begin
- Entities needing dollars sell US Treasuries (most liquid dollar asset)
- Foreign central banks, sovereign wealth funds, pension funds, hedge funds all sell simultaneously
- Treasury yields spike (prices fall) as supply overwhelms demand
Stage 3: Treasury Market Dysfunction
- Primary dealers (banks) required to make markets in Treasuries but constrained by SLR
- Bid-ask spreads widen dramatically; liquidity deteriorates
- Even "on-the-run" Treasuries (most liquid securities in the world) become difficult to trade
- Volatility spikes trigger margin calls, forcing more liquidation
Stage 4: The Amplification
- Treasury sales by dollar-seekers worsen Treasury liquidity
- Worsening Treasury liquidity makes Treasuries less useful as dollar-raising tool
- This forces even more entities into FX swap markets, further widening basis
- Wider basis creates more dollar funding stress, triggering more Treasury sales
Stage 5: Contagion to All Markets
- Treasury dysfunction hits ALL fixed income (Treasuries are pricing benchmark)
- Credit spreads widen dramatically
- Equity markets plunge (discount rate shock + liquidity fears)
- VIX spikes, margin calls proliferate across all asset classes
Why This Loop Is More Dangerous Now
Factors increasing vulnerability:
- Record Treasury issuance: US fiscal deficits mean Treasury supply continues growing. More supply = more potential for disorderly sales
- Foreign holdings near $8 trillion: Foreign entities (central banks, sovereign funds, private investors) hold massive Treasury positions that could be liquidated during dollar stress
- Reduced dealer capacity: SLR constraints mean primary dealers have less balance sheet capacity to absorb Treasury sales
- All-to-all trading growth: Electronic platforms allow direct entity-to-entity trading, which works well in normal times but can amplify fire sales during stress (no dealer buffers)
- China's strategic position: China holds ~$800 billion in Treasuries. Geopolitical tensions create tail risk of weaponized Treasury sales
The FIMA Repo Facility: Bandaid, Not Solution
The Fed created the FIMA Repo Facility in March 2020 specifically to address this doom loop: foreign central banks can temporarily repo their Treasuries to the Fed for dollars, avoiding outright sales.
Why FIMA helps but doesn't solve:
- Only for official institutions: Foreign central banks can use FIMA, but private foreign investors, pension funds, hedge funds cannot
- Stigma risk: Using FIMA signals stress, which some central banks may avoid
- Doesn't address root cause: FIMA provides liquidity but doesn't eliminate the structural fragility—SLR constraints on dealers, massive Treasury supply, interconnection with Eurodollar stress
Evidence of ongoing fragility: Despite FIMA's existence, Treasury market volatility has remained elevated post-2020. "Flash" episodes (brief but severe price dislocations) continue occurring, indicating the market remains structurally fragile.
EARLY WARNING INDICATORS: WHAT TO WATCH
For anyone exposed to global dollar markets—traders, risk managers, treasurers, policymakers—monitoring these indicators provides early warning of building Eurodollar stress:
Tier 1: Direct Eurodollar Stress Indicators
| Indicator | What It Measures | Warning Threshold |
|---|---|---|
| EUR/USD Cross-Currency Basis | Cost of synthetic dollar funding | Widening beyond -50bp or rapid moves |
| JPY/USD Cross-Currency Basis | Japanese dollar funding stress | Widening beyond -40bp |
| USD LIBOR-OIS Spread | Interbank dollar funding stress | Above 30bp (normal: 10-20bp) |
| SOFR-OIS Spread | Repo market stress | Above 20bp or rapid widening |
| Fed Swap Line Usage | Foreign CB emergency dollar needs | Any non-zero usage outside crisis |
Tier 2: Derivative Stress Indicators
| Indicator | What It Measures | Warning Threshold |
|---|---|---|
| Treasury Volatility (MOVE Index) | Bond market stress/uncertainty | Above 120 (elevated: >100) |
| 10Y Treasury Yield | Safe-haven demand or fire sales | Rapid moves (>20bp/day) |
| VIX (Equity Volatility) | General market stress | Above 30 (elevated: >20) |
| DXY (Dollar Index) | Dollar strength (stress indicator) | Rapid appreciation (>3% in week) |
| EM Currency Weakness | Dollar funding stress in EMs | Coordinated EM currency declines |
| Credit Spreads (IG/HY) | Corporate credit stress | Widening >50bp in days |
Tier 3: Institutional Behavior Indicators
- Money Market Fund Flows: Withdrawal from European banks or foreign banks signals counterparty risk concerns (2011 pattern)
- FX Swap Volume Spikes: Sudden increases in FX swap trading volume indicate scramble for synthetic dollars
- Treasury Custody Holdings at Fed: Decline in foreign official Treasury holdings at Fed custody account suggests liquidation
- Primary Dealer Treasury Inventories: Rapid increase means dealers absorbing supply (potential limit approaching)
- Reverse Repo Facility Usage: Money market funds parking cash at Fed's RRP instead of private repo signals risk aversion
Tier 4: Policy and Macro Indicators
- Fed-ECB/BOJ Policy Divergence: Fed tightening while others stay loose widens interest differentials, stressing FX swaps
- US Fiscal Trajectory: Accelerating Treasury issuance increases supply risk
- Geopolitical Events: Major conflicts, sanctions, trade wars trigger risk-off flows and dollar scrambles
- China Economic Stress: Property sector problems, growth slowdown, or banking stress creates contagion risk
- EM Debt Sustainability: Sovereign downgrades, IMF program requests signal building pressure
Single indicator elevated: Monitor closely but not necessarily crisis
Multiple Tier 1 indicators widening simultaneously: High probability of building Eurodollar stress
Tier 1 + Tier 2 indicators both stressed: Crisis likely imminent or underway
All tiers flashing: Systemic crisis in progress; Fed intervention likely needed
TRIGGER SCENARIOS: WHAT COULD IGNITE CRISIS #6
Based on architectural analysis of current vulnerabilities, we can identify plausible scenarios that could trigger the next Eurodollar crisis. These are not predictions of specific events but identification of structural stress points where shocks would cascade.
Scenario 1: Fed Policy Divergence Shock
Trigger: Fed raises rates or maintains elevated rates while ECB, BOJ remain accommodative due to growth concerns or deflationary pressures.
Cascade Mechanism:
- Interest rate differential widens (USD rates >> EUR/JPY rates)
- Synthetic dollar funding (borrow EUR/JPY, swap to USD) becomes dramatically more expensive
- Cross-currency basis widens sharply
- European and Japanese banks/institutions scrambling for dollar funding
- Asset sales (Treasuries, corporate bonds) to raise dollars
- Treasury market dysfunction → doom loop activates
Probability: Moderate-High. Fed policy path diverges from other major CBs regularly. 2013 "Taper Tantrum" demonstrated this pattern.
Timeframe: Could develop over weeks to months as policy divergence becomes clear.
Scenario 2: Japan Crisis (BOJ Policy Pivot or Carry Trade Unwind)
Trigger: Bank of Japan forced to abandon Yield Curve Control or raise rates due to yen weakness, inflation, or fiscal pressures. Or: Major shock triggers mass unwinding of yen carry trades.
Cascade Mechanism:
- Yen strengthens sharply (carry trades become unprofitable)
- Japanese investors liquidate foreign (dollar) assets to repatriate or cover losses
- Massive Treasury sales by Japanese investors (~$1+ trillion potential)
- Japanese banks need to close synthetic dollar positions via FX swaps
- JPY/USD basis explodes wider (2020: BOJ drew $226B from Fed)
- Global dollar scramble as Treasury liquidation and FX swap stress combine
Probability: Moderate. BOJ has maintained ultra-loose policy for decades but faces increasing pressure.
Timeframe: Could be sudden (BOJ surprise policy shift) or gradual (slow carry trade unwind over months).
Scenario 3: China Financial Stress or Geopolitical Shock
Trigger: Chinese banking sector crisis, property sector collapse spillover, or Taiwan conflict triggering sanctions/dollar access restrictions.
Cascade Mechanism:
- Chinese entities' dollar-denominated debt under stress (defaults, restructuring)
- Hong Kong dollar peg threatened (requires massive dollar liquidity to defend)
- Chinese banks and corporates scramble for dollars offshore
- Capital controls limit access; alternative: China liquidates Treasury holdings
- Treasury sales + dollar funding stress + geopolitical risk = triple cascade
- If sanctions cut Chinese entities from dollar system: ripple effects through Asian dollar markets
Probability: Low-Moderate but High Impact. China is opaque; real stress levels unknown until crisis emerges.
Timeframe: Sudden if geopolitical; gradual if financial stress building.
Scenario 4: Emerging Market Cascade
Trigger: Major EM sovereign default, currency crisis, or coordinated EM stress (commodity shock, China slowdown contagion).
Cascade Mechanism:
- One or more large EMs face debt sustainability crisis (Argentina, Turkey, South Africa, others)
- Investors flee EM assets broadly (contagion fear)
- EM currencies weaken, making dollar debts more expensive
- EM entities need dollars to service debts → dollar demand surge
- Fed doesn't provide swap lines to most EMs (unlike 2020 when some got temporary access)
- EM dollar funding stress forces asset liquidation (Treasury sales, equity sales)
- Broader risk-off triggers dollar strength, compounding EM stress (feedback loop)
Probability: Moderate. EM stress is recurring feature; question is severity.
Timeframe: Develops over weeks to months; can accelerate rapidly once capital flight begins.
Scenario 5: Quarter-End Regulatory Event (2019 Redux)
Trigger: Quarter-end or year-end regulatory reporting combined with large Treasury issuance, tax payments, or other liquidity drains.
Cascade Mechanism:
- Banks reduce balance sheet usage near reporting dates (SLR optimization)
- Reduced intermediation capacity in repo and FX swap markets
- Routine liquidity event (tax payments, Treasury settlement) becomes crisis
- Rates spike in repo markets; FX swap basis widens
- Spillover to Treasury markets and offshore dollar funding
- Fed forced to intervene domestically (repo ops) and potentially internationally (swaps)
Probability: Moderate. This happened in September 2019; underlying vulnerabilities (SLR binding) persist.
Timeframe: Sudden onset (intraday to days); typically around quarter-ends.
Scenario 6: The "Unknown Unknown" (Lehman-Type Event)
Trigger: Unexpected failure or crisis at major institution, sudden geopolitical shock, or "tail risk" event that wasn't on anyone's radar.
Why This Matters:
Every major Eurodollar crisis has included surprise elements. 1997: who predicted Thai baht would trigger Asian collapse? 2008: who predicted Lehman would be allowed to fail? 2020: who predicted global pandemic?
The architectural reality: The Eurodollar system is fragile enough that triggers don't need to be directly related to dollar funding. Any major shock that creates:
- Risk-off flight to safety
- Counterparty risk concerns
- Liquidity hoarding
- Asset liquidation needs
Probability: Unknown by definition, but some major shock is likely within 3-5 year window.
Most Likely: Fed policy divergence (Scenario 1) or Quarter-end regulatory event (Scenario 5)
Highest Impact: Japan crisis (Scenario 2) or China shock (Scenario 3)
Most Underpriced: Unknown unknown (Scenario 6) — markets always underestimate tail risks
Key Insight: The specific trigger matters less than the underlying architecture. Any significant shock can cascade because the vulnerabilities (synthetic dollar leverage, maturity mismatch, Treasury-Eurodollar doom loop, regulatory constraints on intermediation) are structural and persistent.
CONCLUSION: FRAGILITY COMPOUNDED, NOT REDUCED
The Current State of the Eurodollar System
As of December 2025, the Eurodollar system exhibits the following characteristics:
UNCHANGED since 2020:
- No lender of last resort except Fed (via swap lines)
- Synthetic dollar creation via FX swaps continues growing
- Off-balance-sheet leverage remains largely invisible to regulators
- Market segmentation prevents efficient capital reallocation
- Maturity mismatch requires continuous rollover of short-term funding
WORSE than 2020:
- Moral hazard from repeated Fed interventions encourages more risk-taking
- Cross-currency basis still negative (structural warning signal)
- Geographic vulnerabilities increased (Japan carry trades, China opacity, EM debt)
- Treasury-Eurodollar interconnection tighter (doom loop more dangerous)
- Regulatory uncertainty (Basel III Endgame) creates unpredictability
NOMINALLY BETTER:
- More permanent Fed facilities (SRF, FIMA, standing swaps)
- Higher bank capital levels
- Better stress testing
But these "improvements" are architectural bandaids: They increase Fed's permanent role backstopping fragile markets rather than eliminating the fragility. The system is more dependent on central bank support, not more resilient.
The Forward-Looking Assessment
Based on the vulnerabilities documented in Part 3:
1. Crisis #6 is not a question of "if" but "when" and "what triggers it."
The architectural vulnerabilities that caused five crises (1997, 2008, 2011, 2019, 2020) remain fundamentally unchanged. The specific trigger will vary, but the cascade mechanism is structurally embedded.
2. The next crisis will likely cascade faster than March 2020.
Interconnection has grown, synthetic dollar leverage has increased, algorithmic trading dominates markets, and participants have learned that liquidity can evaporate instantaneously. The time from "emerging stress" to "full crisis" continues compressing.
3. Fed intervention will be required but may face limits.
The Fed has repeatedly intervened with "unlimited" support. But each intervention raises the stakes for the next one. Political constraints (domestic inflation concerns, Congressional scrutiny), operational constraints (how much can Fed realistically provide?), and credibility constraints (what if markets test Fed's limits?) may eventually bind.
4. Multiple simultaneous stress points increase systemic risk.
Japan, China, and EM vulnerabilities could cascade simultaneously rather than sequentially. A crisis originating in one geography but spreading to others (via dollar strength feedback loops) could overwhelm even Fed's capacity to provide sufficient liquidity quickly enough.
5. The Treasury-Eurodollar doom loop is the most dangerous current vulnerability.
March 2020 demonstrated that Eurodollar stress manifests as Treasury market dysfunction. With record Treasury supply, foreign holdings, and reduced dealer capacity, the next episode could be more severe. Treasury market is supposed to be the ultimate safe, liquid asset—if it becomes illiquid during dollar stress, there's nowhere left to hide.
The Eurodollar system in December 2025 is architecturally more fragile than at any point since March 2020. The combination of:
- Persistent negative basis (warning signal)
- Geographic stress points (Japan, China, EM)
- Regulatory constraints on intermediation (SLR, Basel uncertainty)
- Treasury-Eurodollar doom loop
- Moral hazard from repeated Fed interventions
...creates a system primed for crisis upon any significant shock.
For market participants: Monitor the early warning indicators closely. For policymakers: Understand that "solutions" to date have increased Fed's permanent support role without addressing root architectural fragilities. For everyone: Recognize that the next Eurodollar crisis is baked into the current architecture—only its timing and specific trigger remain unknown.
In Part 4, we examine whether any viable alternatives to the current Eurodollar architecture exist, why attempts to build them have failed, and what actual system collapse would look like.
Part 4: Alternatives & Endgame
Can anything replace the dollar? Why is China's digital yuan marginal? What would Eurodollar system collapse actually look like? And is there any path to stable reform—or only catastrophic restructuring?
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