Scott Bessent’s ability to offer dollar swap lines to allies in Asia and the Gulf could be limited by the limited firepower of the Treasury Department under his command, analysts warned.
Although the Federal Reserve has no formal cap on the amount of dollars it can provide to foreign central banks, the U.S. Treasury’s own capacity to do so is much more limited.
The Treasury Secretary said on Wednesday that several countries in Asia and the Gulf, including the United Arab Emirates, had asked him for swap lines as a backstop to support renewed demand for the US currency – driven by high oil prices – since the US and Israel attacked Iran.
A person familiar with the matter said nothing concrete had been decided yet on whether to offer the aid. But if the US Treasury were to announce swap lines, these facilities would almost certainly come from the $219 billion Exchange Stabilization Fund (ESF).
“There is a great irony in suggesting that the UAE, with reserves of nearly $300 billion and a reported $2 trillion in its sovereign wealth funds, should borrow from the ESF,” said Brad Setser, a senior fellow at the Council on Foreign Relations. “It’s a much smaller amount of money.”
Shahab Jalinoos, head of G10 currency strategy at UBS, said: “This may be more of a political signal than a consequence of a monetary crisis… It would be a vote of confidence in the US relationship with the UAE and other Gulf countries.”
The ESF is mainly used for limited interventions in foreign economies that have run out of reserves or have maximized IMF lending. The US Treasury last used this last year to provide Argentina with a short-term bailout of $20 billion to prevent a run on the peso in the run-up to the elections.
That’s in stark contrast to the Fed, whose swap lines, which allow countries to exchange their currencies for U.S. dollars, are potentially unlimited since the central bank has a monopoly on issuing U.S. currency.
However, officials with knowledge of the matter said the U.S. central bank had not been formally consulted about Bessent’s talks with officials from the Gulf states and Asia. A Fed spokesman declined to comment.
The Fed’s swap lines serve a different function: The central bank views them as a means to meet short-term needs for dollar financing – which officials say are currently lacking – and would be reluctant to use them to help countries ease pressure on their currencies.
Seth Carpenter, chief global economist at Morgan Stanley, said the U.S. Treasury’s willingness to offer swap lines to countries like Argentina and possibly the UAE appeared to be driven by a “philosophical affinity” rather than “cleaning up the drains” as at the Fed’s facilities.
Bessent’s comments came as countries tried to defend their currencies against a stronger dollar. Foreign central banks’ holdings of U.S. Treasuries are hovering around the lowest levels since 2012, suggesting some reserve managers are selling dollar assets to raise funds to intervene in currency markets.
Many countries in the Gulf and Asia maintain official or de facto dollar pegs. Several countries in the Gulf region have also announced major spending commitments in U.S. industry, which will require even more dollars.
Mahmood Pradhan, a former IMF official who is now a non-resident at the Bruegel think tank, said: “Gulf countries may be looking at a weaker outlook for inflows, due to export disruptions and lower capital inflows.
“A precautionary cushion, especially given their currency pegs, would be reassuring to markets. In the past, the Fed has preferred to limit their swap lines to only major currencies, which could explain why Gulf countries would approach the Treasury.”
In Argentina’s case, up to $20 billion was available on government bonds, but the South American country ended up lending only $2.5 billion for two months to support the peso, which stabilized after key elections.
Although the facility was controversial among some US lawmakers, White House economic adviser Kevin Hassett said earlier this week that rather than cost US taxpayers money, it had saved money.
Handing over an ESF swap line to the UAE like Argentina’s would be very different from a Fed swap line, says Lev Menand, associate professor at Columbia Law School and author of The Fed Unbound: Central Banks in Times of Crisis.
“The latter helps you run a dollar-based financial system without many dollar reserves. The former was essentially a loan to the… [Argentine] government,” he said.
The UAE was frustrated by the leak of the fact that it had discussed a swap with the US Treasury Department and by inferences that this indicated a liquidity crisis in the Gulf state.
Yousef al-Otaiba, the UAE ambassador to Washington, said that “any suggestion that the UAE needs external financial support misinterprets the facts.”
“The UAE is one of the most financially resilient economies in the world, backed by more than $2 trillion in sovereign wealth assets,” he said on X.
Investors said the swap line requests would likely be a stopgap measure against further economic fallout from the conflict in the Middle East.
“They want an emergency support for the dollar in case the funding markets for the Asian dollar or Gulf dollar revenues dry up,” said Viktor Szabo, investment director at Aberdeen, describing it as “more of a confidence measure than a willingness to use such lines.”
“It could also reduce the need for them to sell dollar assets if they need more dollar liquidity,” Szabo added.
Mark Sobel, senior economics adviser at the Center for International and Strategic Studies and a former official at the IMF and US Treasury, said: “The global dollar network is not under enormous pressure as it was during the [global financial crisis] and pandemic. Gulf countries often have enormous amounts of dollars and are unlikely to suffer from liquidity problems.”
The only strong argument for providing countries like the UAE with swap lines would be to avoid disruption to financial markets, said Stephen Paduano, a lecturer at Oxford University and a former adviser to the US Treasury Department.
The UAE, he said, “has more than enough US stocks and government bonds to meet its needs. But selling them could cause a stock market drop and affect the functioning of the government bond market.”
The Gulf states boast some of the largest and most active sovereign wealth funds in the world, managing more than $5 trillion. These include the Abu Dhabi Investment Authority, the Saudi Public Investment Fund, the Qatar Investment Authority and the Kuwait Investment Authority.
Swap lines have been a crucial backbone of the global dollar system, especially in the aftermath of the 2008 financial crisis. The Fed still maintains lines with the major global central banks in the Eurozone, the United Kingdom, Switzerland, Japan and Canada.
When foreign central banks are given special liquidity privileges for dollars in the form of swap lines, the U.S. typically holds the foreign currency. In return, the foreign central bank prevents financial companies under its jurisdiction from selling assets or defaulting on their dollar obligations. This prevents the risk of infection and global panic.
The Fed also has a backstop — the so-called Foreign and International Monetary Authorities, or FIMA, repo facility — that allows foreign countries to use their holdings of U.S. Treasuries to access short-term dollar financing without having to sell their Treasuries.
Sobel said he was unsure whether the U.S. Treasury Department would continue offering swaps to Gulf states. He added: “The reason for doing this would be to send a political signal of support and a message about strengthening dollar dominance.”
The U.S. Treasury Department did not respond to a request for comment.
Additional reporting by Ian Smith, Joseph Cotterill and Andrew England in London
