The possibility of a currency swap line between the United States and the UAE is generating interest in a financial tool that plays a crucial role in the global economic landscape.
According to the Wall Street Journal, discussions have emerged between the United States and the UAE regarding a swap line. However, some officials are puzzled by the Emirates’ need for financial assistance, especially considering its vast reserves exceeding $2 trillion in government investments and over $300 billion in foreign exchange reserves amid the ongoing conflict with Iran.
Initially, comparisons were drawn to Argentina’s $20 billion currency swap with the U.S. Treasury aimed at stabilizing the peso. In contrast, the UAE maintains it is not in need of such external financial help.
Yousef Al Otaiba, the UAE Ambassador to the U.S., stated that any notion of the UAE requiring external support reflects a fundamental misunderstanding. Similarly, Dr. Thani Al Zeyoudi, the UAE Foreign Trade Minister, emphasized that discussions of a UAE-U.S. swap line do not pertain to a potential bailout, referring to it as “an elite problem.”
Dedicated Hub
Currently, only a handful of central banks—Canada, the UK, Japan, Switzerland, and the European Central Bank—have active swap line arrangements with the U.S.
As the UAE actively seeks to diversify away from oil, cities like Abu Dhabi and Dubai are positioning themselves as significant financial centers.
Derek Tan, an economist at MPA Macro, noted that these cities differ from major financial hubs like New York and London because they are less intertwined with traditional financial entities. He remarked, “These swap lines are a missing piece of the puzzle.”
The introduction of a U.S.-UAE swap line could also signal stability for the dirham, which is pegged to the dollar. Once implemented, investors might feel more comfortable placing their assets in local currencies. Tan added that this development could intensify competition within the region, particularly as Saudi Arabia strives to establish Riyadh as a business center, making Abu Dhabi and Dubai more cognizant of competing interests.
Swap Origin
Swap lines trace their origins back to the Bretton Woods Agreement in the 1960s, becoming closely associated with the Federal Reserve. During times of crisis, the Fed functions as an indirect lender of last resort to foreign central banks.
These facilities were notably utilized during the 2008 financial crisis and the initial phase of the COVID-19 pandemic, peaking at over $580 billion in late 2008. The Dallas Fed reported that approximately $450 billion was utilized in dollar liquidity swaps during the COVID crisis.
How Do Swap Lines Work?
In a typical swap line agreement, the U.S. and a foreign central bank exchange equal amounts of their currencies, returning the same amounts on a specified date. For the potential U.S.-UAE swap, the Federal Reserve would lend U.S. dollars while receiving dirhams in return, with the arrangement reversing later.
The Fed also has the Foreign and International Monetary Authority (FIMA) Repo Facility available, which theoretically allows the UAE to convert its U.S. Treasury holdings without establishing a new dollar swap line. Nonetheless, the intricate structure of the Federal Reserve could delay the implementation of a U.S.-UAE swap line, as it would need to pass through the approval of multiple Fed governors.
Meanwhile, the Ministry of Finance has introduced swap lines through the Exchange Stability Fund (ESF), which comprises U.S. dollars, foreign currencies, and special drawing rights (SDRs) created by the IMF. The Treasury Secretary wields considerable authority in establishing currency swaps without needing parliamentary approval, as demonstrated during Argentina’s bailout.
That said, this flexibility has its constraints; the ESF is limited to about $43 billion, while the Fed’s agreements could, in principle, be limitless.
New Fed Chair, New Expectations
The renewed focus on swap lines coincides with leadership changes at the Federal Reserve, where President Trump has recently intensified concerns over its independence.
As Jerome Powell’s term as Fed Chair concludes, attention is shifting to Kevin Warsh, his anticipated successor. In his Senate Banking Committee nomination hearing response, Warsh suggested a reevaluation of the Fed’s approach to swap lines, arguing that central bank independence should be considered in light of monetary policy.
Treasury Secretary Scott Bessent has advocated for a broadened role for the U.S. dollar, claiming that a swap line with the UAE would mutually benefit both nations. He noted that similar requests have arisen from other Gulf states and Asian allies.
This renewed focus on swap lines emerges as the UAE has distanced itself from OPEC and continues to receive advanced military technology from the U.S. In further remarks, Bessent indicated that these discussions are reflective of long-standing dialogues with partners and emphasize the resilience of the U.S. dollar.
Tan commented that for Bessent and Warsh, enhancing the execution of swap lines could solidify the U.S. dollar’s position as the leading global reserve currency, intertwining economic relations with military cooperation and technology transfers to strengthen alliances.
