Charles Lichfield and Maxamillian Rajaobelina-Phipps
You may have heard that the United States is considering offering currency swaps—or “swap lines”—with allies in the Persian Gulf and Asia. Over the past week, the news has generated some confusion, as it has been framed as the opening of central bank swap lines. But that isn’t exactly correct.
Instead, the US administration is weighing the use of the Treasury Department’s Exchange Stabilization Fund (ESF) to temporarily exchange currencies with the United Arab Emirates (UAE) and perhaps others in the Gulf that may request such a swap.
The Trump administration’s favorite swap tool rests in Treasury, not the Fed
While ESF funds were used domestically for temporary insurance programs in 2008 and for pandemic-era fund disbursements in 2020, they have not been used to lend to foreign governments since 2002, when the United States provided $1.5 billion in bridge financing to Uruguay’s central bank.
That was until 2025, when the US Treasury, under Secretary Scott Bessent, extended a $20 billion swap line to Argentina, buoying the market ahead of the legislative midterms—which the party of President Javier Milei later won handily with 40 percent of the vote.
Using the ESF for currency swaps gives the US executive branch a key advantage: it does not require approval from Congress—an issue that came under scrutiny when Bessent testified before the Senate last week. It also avoids the more time-consuming process through the Federal Reserve, which can open temporary swap lines beyond its five permanent partners only with approval from the Federal Open Market Committee. Yet that flexibility comes with a capacity constraint. The ESF has a ceiling of just above $40 billion and, if Mexico and Argentina were to tap back into their lines of $20 billion and $9 billion respectively, only limited capacity would remain for new partners. In theory, US holdings of Special Drawing Rights (SDRs) could also be mobilized under the ESF, though this brings additional layers of complexity.
Much speculation, and few firm answers
There is some speculation that the UAE wants to build a path toward a permanent dollar swap line, and this might be the first step. Indeed, permanent swaps aren’t constrained by the ESF’s on-hand liquid assets—$23.5 billion of Treasury securities and $19.3 billion of foreign currencies and securities—and would provide markets with the certainty that the partner country will always be able to secure dollar funding in a pinch.
Progress on this front will hinge on the appointment of Kevin Warsh as the next Fed chair. He has noted that “international finance” should be an area where the Fed is not strictly independent, implying greater collaboration with the executive branch. Some market commentators are already applauding discussion on temporary swaps as steps toward entrenching the Gulf’s membership in a dollar alliance, in stark contrast to Iran, which has begun charging fees for passage through the Strait of Hormuz in yuan and digital currencies.
Still, focusing on the here and now, no public commentary has yet fully explained why the UAE and others may need the temporary liquidity support they’ve been offered. Bessent has highlighted persistent cash flow issues as a reason for swaps, but even under the current circumstances the Gulf countries are cash-rich and heavily dollarized, with large asset holdings that could be used in dollar swaps without being sold, including US Treasuries and other equities and bonds.
Geopolitics over macroeconomics?
So, what’s really behind the currency-swap idea? One explanation may be geopolitical. The knock-on effects of the Iran war have done more than inconvenience the Gulf states, which have lost billions in income and suffered infrastructure damage. Even their budgets are finite, and that pressure could imperil promised investments into the United States, like the recently announced plan by the state-owned Abu Dhabi National Oil Company to commit tens of billions to US natural gas projects. Last week, Bessent suggested that the swaps would, among other things, be used to help promote trade and investment with the United States, while avoiding the disorderly sale of US assets.
But leverage may go both ways. Much has been made of yesterday’s news that the UAE will be leaving the Organization of the Petroleum Exporting Countries (OPEC), the oil exporters’ cartel it helped found in 1960. The UAE is benefiting from low extraction costs and the fact that some of its own refineries and export facilities, while exposed to Iranian missiles and drones, are situated east of the Gulf of Hormuz—and thus mostly unaffected by the blockade of the strait. Exporting via this route won’t make up for the larger capacity in the port of Dubai, but the UAE’s interests are indeed more aligned with the United States, which wants more supply and lower prices, than with other OPEC members who prefer to control supply to keep prices up. Is the US-proposed dollar swap meant to help tip the scales for the UAE?
It’s a possibility that shouldn’t be ruled out. After all, the Trump administration has repeatedly shown that it isn’t just prepared to reach far into the extant rule book to find tools to apply pressure. It is also happy to find devices which can reward good behavior or assist those it has impacted through its policies.
Charles Lichfield is the director of economic foresight and analysis and the C. Boyden Gray senior fellow at the Atlantic Council’s GeoEconomics Center.
Maxamillian Rajaobelina-Phipps is a young global professional with the Atlantic Council’s GeoEconomics Center.
Image: Macro close-up of a US hundred dollar bill and UAE fifty dirham banknote. Source: iStock.