Discussion on dollar swap lines heats up, Besent backs financial rescue for Gulf nations

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U.S. Treasury Secretary Besant openly endorsed the dollar swap line arrangements, characterizing them as a strategic tool to maintain dollar hegemony rather than a simple bailout for wealthy Gulf nations.

According to media reports on the 27th, UAE Central Bank Governor Khaled Mohamed Balama proposed the concept of currency swap lines to Besant and Federal Reserve officials during meetings in Washington, stressing that if dollar liquidity becomes critical, the UAE may be forced to settle oil trades in alternative currencies.

Besant later posted on social media, describing the swap line discussions as "routine dialogues carried out over many years between the Treasury and partners,” and claiming it “is evidence of the dollar’s dominant status and the strength of the United States’ economic shield.” Trump also expressed support in a CNBC interview, saying “If they have difficulties… I would support them.”

Once implemented, the swap lines will provide the UAE central bank with low-cost dollar financing channels, preventing it from being forced to sell U.S. treasuries and other dollar-denominated assets, thereby avoiding disorderly market volatility. Meanwhile, Bahrain established about $5 billion of swap lines with the UAE earlier this month, and Gulf countries have raised billions of dollars through private debt placements, mainly purchased by PIMCO.

War Shock: UAE Economy Under Pressure, Dollar Reserves Running Low

The Iran war caused multi-dimensional impacts on the UAE economy, prompting its search for dollar liquidity support.

The war damaged the UAE’s oil and gas infrastructure and blocked its ability to transport oil through the Strait of Hormuz, cutting off this crucial source of dollar income. Meanwhile, regional instability led to a sharp decline in tourism—another important hard currency source. Reports indicate that UAE officials pointed out in talks with the U.S. side that it was Trump’s decision to strike Iran that drew the UAE into this destructive conflict, and its economic impact may not be over.

The UAE dirham is pegged to the dollar, backed by $270 billion in foreign exchange reserves. However, analysts note that risks of capital outflow, stock market volatility, and other disruptions triggered by the war have put pressure on this currency anchor. S&P Global noted in a March report this year that the UAE’s “ample fiscal, economic, external, and policy flexibility” provides an effective buffer, but also warned that “the possibility of prolonged oil export disruptions” and infrastructure damage pose clear risks to expectations.

The Logic of Swap Lines: Stabilizing the Currency Anchor, Avoiding Asset Sell-off Spirals

The reason swap lines are seen as superior to tapping sovereign wealth funds lies primarily in their ability to protect market stability.

UBS economist Paul Donovan pointed out that if Gulf central banks use liquid assets in their foreign exchange reserves (such as U.S. treasuries) to meet fiscal needs, it will quickly raise questions about the stability of local currencies’ dollar peg. Gulf sovereign wealth funds total over $5 trillion, but most holdings are in less liquid assets designed for long-term returns, not to address short-term liquidity crises. Forced liquidation could trigger a vicious market sell-off spiral similar to what occurred in the UK during Liz Truss’s tenure as Prime Minister.

The mechanism of swap lines is: The Federal Reserve or Treasury exchanges dollars for the other central bank’s currency, then swaps back at the original exchange rate upon maturity, thus providing dollar liquidity without disturbing the market. The Fed used this tool extensively during the 2008 financial crisis and early COVID-19 pandemic.

UBS also warned that in the medium to long term, post-war reconstruction and rearmament may still put asset sales on the agenda.

Political Risk: Public Pressure Over Aiding Wealthy Nations and Strategic Considerations of Dollar Hegemony

The swap line arrangement faces political sensitivity in the U.S., but Besant chose to defend it within the narrative frame of dollar hegemony.

Critics may interpret this as an “unnecessary bailout” for the UAE, one of the world's highest per capita income countries, while the Trump administration’s economic approval rate has steadily declined due to supply shocks, rising oil prices, and inflation pressures caused by the war. Besant’s strategy is to characterize swap lines as an embodiment of “U.S. economic leadership,” stressing their role in “countering the rise of alternative payment systems.”

UAE officials also played this card during negotiations—clearly implying that if dollar liquidity proves insufficient, the UAE might be forced to settle oil trades in other currencies, posing a potential threat to the dollar’s dominance in global commodity transactions.

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