Analysts caution that US Treasury Secretary Scott Bessent's ability to provide dollar swap lines to allies in Asia and the Gulf region may be constrained by the limited firepower of the Treasury's available tools. While the Federal Reserve can supply dollars to foreign central banks without a formal ceiling, the US Treasury's own capacity to do so is significantly more restricted.
Secretary Bessent stated on Wednesday that renewed demand for dollars, driven by high oil prices following US and Israeli attacks on Iran, has prompted several nations in Asia and the Gulf, including the United Arab Emirates, to request swap arrangements as safeguards to support dollar needs. A person familiar with the matter indicated that no specific decisions have been made regarding such support. However, if the Treasury does announce swap lines, they would almost certainly be drawn from its $219 billion Exchange Stabilisation Fund (ESF).
Brad Setser, a senior fellow at the Council on Foreign Relations, remarked on the irony of the UAE, which holds nearly $300 billion in foreign exchange reserves and a reported $2 trillion sovereign wealth fund, potentially needing to borrow from the ESF, a much smaller pool of funds. Shahab Jalinoos, head of G10 foreign exchange strategy at UBS Group AG, suggested the move may be more of a political signal than a response to cash shortages, representing a vote of confidence in US relations with the UAE and other Gulf nations.
The ESF is primarily used for limited interventions in foreign economies that have exhausted their reserves or reached IMF lending limits. The Treasury last utilized the fund in the previous year, providing a $20 billion short-term bailout to Argentina to prevent a run on the peso ahead of elections. This contrasts sharply with the Fed, whose swap lines—allowing countries to exchange their currencies for dollars—are theoretically unlimited due to the Fed's monopoly on dollar issuance.
According to informed officials, the US central bank has not been formally consulted regarding Bessent's discussions with Gulf and Asian officials. A Fed spokesperson declined to comment. The Fed views its swap lines as tools to address short-term dollar funding needs—which officials say currently do not exist—and is reluctant to use them to help countries alleviate pressure on their own currencies.
Bessent's comments come as nations seek to defend their currencies against a strengthening dollar. Foreign central banks' holdings of US Treasuries are near their lowest levels since 2012, indicating some reserve managers are selling dollar assets to fund market interventions. Many Gulf and Asian countries maintain formal or de facto dollar pegs. Some Gulf states have also announced substantial spending commitments in US industries, increasing their dollar requirements.
Mahmood Pradhan, a former IMF official and non-resident fellow at the Bruegel think-tank, noted that Gulf countries may face weakened capital inflows due to export disruptions and reduced investment, making preventive buffers crucial for maintaining market confidence, especially under dollar pegs. He suggested that the Fed's historical preference for limiting swap lines to major currencies may explain why Gulf nations are approaching the Treasury.
In Argentina's case, the Treasury's swap line offered up to $20 billion, but the country ultimately borrowed only $2.5 billion over two months to support the peso, which stabilized after a key election. While controversial among some US lawmakers, White House economic adviser Kevin Hassett stated earlier this week that the arrangement "made money" rather than costing US taxpayers.
Lev Menand, a Columbia Law School professor and author of "The Fed Unbound: Central Banking in a Time of Crisis," highlighted the fundamental difference between an ESF swap line to the UAE, similar to Argentina's, and a Fed swap line. The latter helps a country operate a dollar-based financial system with limited dollar reserves, while the former essentially constitutes a loan to the government.
The UAE has expressed dissatisfaction with the leak of swap discussions with the Treasury and rejected implications of liquidity stress. Yousef al-Otaiba, the UAE's ambassador to Washington, stated that any suggestion the UAE requires external financial support misrepresents the facts, emphasizing the country's financial resilience backed by over $2 trillion in sovereign investment assets.
Investors suggest the swap requests are likely precautionary measures against further economic fallout from Middle East conflict. Viktor Szabo, an investment director at Aberdeen, described it as a confidence-building measure rather than an intention to use the lines, potentially reducing the need to sell dollar assets for liquidity. Mark Sobel, a former IMF and US Treasury official, noted that the global dollar network is not under significant stress currently, and Gulf states, with substantial dollar holdings, are unlikely to face liquidity pressure.
Stephen Paduano, a lecturer at Oxford University and former US Treasury adviser, argued that the only compelling reason for providing swap lines to the UAE or similar nations would be to prevent financial market disruption. He pointed out that while the UAE holds sufficient US stocks and bonds to meet its needs, selling these assets could trigger market declines and impair Treasury market functioning.
Gulf states have access to some of the world's largest and most active sovereign wealth funds, managing over $5 trillion collectively, including the Abu Dhabi Investment Authority, Saudi Arabia's Public Investment Fund, the Qatar Investment Authority, and the Kuwait Investment Authority. Swap lines have been a key pillar of the global dollar system, especially since the 2008 financial crisis, with the Fed maintaining arrangements with major central banks in the eurozone, UK, Switzerland, Japan, and Canada.
When foreign central banks receive privileged dollar liquidity via swap lines, the US typically holds their currency in return. This helps prevent financial firms from selling assets or defaulting on dollar obligations, averting contagion and global panic. The Fed also offers a backup facility—the FIMA repo facility—allowing foreign central banks to use their US Treasury holdings for short-term dollar funding without selling them.
Sobel expressed uncertainty about whether the Treasury will actually extend swap lines to Gulf nations, suggesting that any such move would signal political support and reinforce the dollar's dominant role.
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