Swapcraft
Who gets thrown a dollar lifeline?
The Central Bank Governor of the United Arab Emirates, in a moment between an Iranian missile buzzing over his head and the umpteenth drone attack on his gas fields, must have looked up and said, hey, we’re going to get paid for this, right?
The Wall Street Journal reports:
U.A.E. Central Bank Gov. Khaled Mohamed Balama raised the idea of a currency-swap line with Treasury Secretary Scott Bessent and Treasury and Federal Reserve officials in meetings in Washington last week, the officials said.
Swap lines are being selectively offered and openly negotiated. Which decision-makers in Washington grant them and through which mechanisms will dictate the long-term integrity of the dollar system. Let’s examine the options on the table.
A brief history of U.S. liquidity assistance
When we talk about liquidity, we’re talking about the free flow of U.S. dollars in the global economy. Liquidity is like gasoline in an engine. If parts of the global economy run out of dollars, the engine seizes up and financial transactions fall apart. To prevent this, the U.S. maintains several dollar liquidity tools for different purposes.
Central bank liquidity swap lines
The U.S. Federal Reserve’s central bank swap lines are the most powerful tool in the Fed’s toolbox. Swaps allow the Fed to lend out U.S. dollars to foreign central banks in exchange for local currencies as collateral. Foreign central banks can then deploy those dollars domestically, and at a specified future date, repay them to the Fed at the same exchange rate. This is not charity. Central banks who activate their swap lines pay a market-based interest rate to the Fed. Fed swap lines create a clean, collateralized transaction that keeps dollar liquidity flowing uninterrupted like the swallows of Capistrano.
The use of swap lines by the Fed has evolved across three distinct periods: 1) protect the U.S. gold stockpile, 2) defend the stability of the dollar, and 3) save the world.
Protect the gold stockpile: The Fed first established swap lines in 1962 to stave off a run on the U.S. gold stockpile. Under the Bretton Woods system, foreign central banks had the right to convert dollars into gold at $35 an ounce. As U.S. spending grew, by the early 1960s outstanding dollar liabilities exceeded the amount of gold the U.S. held. The Fed deployed swap lines to get local currencies from foreign central banks, then used those currencies to buy back unwanted dollars and forestall gold conversion requests. It felt like a house of cards. Turns out it was! Once Nixon faced the music and ended gold convertibility, it cost the Fed and U.S. Treasury a combined $2.5 billion to unwind the arrangements.
Defend the stability of the dollar: After Bretton Woods collapsed and gold convertibility was no longer an issue, swap lines were repurposed for currency stability. With many currency exchange rates now floating, the Fed used swaps to finance foreign-exchange interventions, using foreign currencies to buy the dollar when it was depreciating too fast or giving foreign banks dollars to sell when it was strengthening too fast. 85% of U.S. drawings involved German marks as the world’s second most important reserve and trading currency at the time. By 1980, the Fed had stopped using the lines for intervention and wound down the G10 facilities in November 1998 as half of these countries prepared to give up their national currencies for the euro. The last artifact of this era was the 1994 North American Framework Agreement (NAFA) swap lines with the Bank of Canada ($2 billion) and the Bank of Mexico ($3 billion) — financial backstops to our largest trading partners, and subject to annual renewal by the Fed. Both still exist: Mexico last drew on its Fed line in 1995; Canada never has.
Save the world: The modern era of swap lines began after 9/11, when the Fed established temporary 30-day swap lines with the European Central Bank (ECB) ($50 billion), the Bank of England ($30 billion), and the Bank of Canada (raised the NAFA line from $2 billion to $10 billion). The lines expired after a month. This era kicked into high gear in 2007, when the Fed authorized lines with the ECB and Swiss National Bank as dollar funding markets tightened during the Global Financial Crisis. Now the Fed was firmly the world’s lender of last resort. The swap network expanded to 14 central banks by late 2008, contracted, then was reauthorized for five central banks in 2010 during the European sovereign debt crisis. In December 2008, lending through swap lines peaked at $580 billion. In 2013, those five lines — with the Bank of England, ECB, Bank of Japan, Bank of Canada, and Swiss National Bank — were converted into standing arrangements with no expiration date. During COVID, the Fed reactivated temporary lines with the same 9 other central banks that had received them during the Global Financial Crisis — lending reached $470 billion in May 2020 and those temporary lines expired in 2021.
Foreign and International Monetary Authorities (FIMA) Repo Facility
In 2020, the Fed established and later made permanent the FIMA Repo Facility — which allows central banks holding U.S. Treasuries in custody at the New York Federal Reserve to temporarily exchange their Treasuries for dollars through overnight repurchase agreements. This tool is basically like the U.S. letting other central banks borrow gasoline overnight with a barrel of oil posted as collateral. The FIMA facility is collateralized by Treasuries, carries no foreign exchange risk to the Fed, but central banks must apply to use it. The Fed doesn’t always want to carry everyone’s fun-sounding currencies on its balance sheet (the ngultrum, the quetzal, the dong), so this is a way for central banks that don’t qualify for a swap line to access dollar liquidity.
Exchange Stabilization Fund
The third major instrument is the Exchange Stabilization Fund (ESF). Created in 1934 under the Gold Reserve Act, the ESF is managed by the Treasury Secretary with minimal congressional oversight. This is like a roving fuel truck that shows up wherever gas is needed, with less capacity but fewer restraints. The ESF’s role has expanded over the years and has been used to intervene in foreign exchange markets, extend credit to foreign governments, and backstop domestic financial markets. It backed Mexico in 1995, guaranteed U.S. money market funds during the 2008 crisis, and supported the Fed’s emergency lending programs during COVID. The ESF currently holds approximately $218 billion in total assets, though as of right now only $44 billion is uncommitted — with most assets tied up in IMF reserve assets and various foreign currencies — limiting its impact.
Argentina, the UAE, and swaps as “deal guy” tools
The United States is now entering our fourth era of dollar liquidity assistance: deal guy tool. In case you’re less online than I am (bless you), there’s lots of talk on how the U.S. has thrown established processes out the window in favor of the deal guy — entrepreneurial and unburdened by what has been. Is liquidity assistance a deal guy tool?
In 2025, the Trump administration extended a $20 billion currency swap to Argentina’s central bank through the ESF. The U.S. Treasury used the ESF to purchase Argentine pesos on the open market. This was the first large-scale U.S. financial rescue of a foreign economy since the ESF’s $20 billion loan to Mexico in 1995. More importantly, it was the first explicit use of the ESF tied to the electoral victory of a foreign political party (Milei’s La Libertad Avanza). The precedent set by Argentina creates a new dynamic: countries now understand that liquidity assistance from the United States is negotiable and tied to their relationship or cooperation with the U.S. Surely others will come to our door, hat in hand.
Cue the UAE! Now this case is a real sticky wicket because the UAE’s currency, the dirham, is pegged to the dollar, and backed by approximately $270 billion in foreign currency reserves. While the country is under financial strain and missile attack, it hasn’t experienced catastrophic dollar shortfalls from the Iran conflict. Yet the UAE Central Bank Governor still raised the possibility of a swap line in Washington with both the Treasury Secretary and Federal Reserve officials. Abu Dhabi likely recognizes that Washington is shifting into its deal guy era. It was widely reported that the head of UAE’s central bank noted that, without access to dollar liquidity, they may have to switch to denominating oil contracts in Chinese RMB — I mean, this is just classic negotiating leverage. The art of the deal, as it were.
Secretary Bessent came out this week supporting aid for the UAE. He also noted that numerous countries from the Middle East and Asia have requested swap lines. Given this support, we can only expect this kind of behavior to increase and the administration is going to need a plan for how to triage these requests.
Keep the Fed lines sacred…
American economic historian Charles Kindleberger, in his cheery tome The World in Depression, argued that global economic stability requires a hegemon willing to perform three functions: maintain a market for distressed goods, provide countercyclical lending, and act as lender of last resort. The failure of the interwar period, in his analysis, was not the absence of a capable hegemon but the absence of a willing one. The United States, having displaced Britain as the dominant economic power, was not yet prepared or willing to bear the systemic responsibilities that role demanded.
The Federal Reserve’s standing swap lines are the modern institutionalization of the lender-of-last-resort function. Their value comes from the fact that they are provided to banks of systemic importance to the global financial system, not political importance.1 The promise of stability and follow-through from the U.S. has reinforced the dollar’s dominant position. Strip away that promise, and the instrument loses its stabilizing power and undermines confidence in the dollar system.
As one hypothetical, imagine a global liquidity squeeze stemming from any of the numerous risks facing the global economy right now (private credit, supply shocks, etc.). One of the five central banks that have standing access to Fed swap lines might tap them to smooth funding issues. But what if the U.S. made swap lines for, let’s say, the European Central Bank contingent upon Europe sending troops to help us open the Strait of Hormuz? The Europeans might comply at first, to avoid a banking crisis, but that’d be the beginning of the end for the offshore dollar. Others would stop treating dollar liquidity as a reliable public good very quickly.
However, we now live in an era of great power competition. Perhaps the rules do need to change. In 2008, the Fed noted that countries that received a swap line had economic size sufficient enough to cause global spillovers, a track record of sound macroeconomic policy, and a specific dollar funding problem that a swap line could plausibly address. In 2026, might the Fed consider adding swap line criteria to include countries that actively advance and maintain dollar dominance? The Fed would need to be very explicit about what counts as sustaining dollar dominance, otherwise it would devolve into an “I’m Spartacus” situation of countries explaining why their country is particularly important to sustaining the dollar’s role.
…And lean into the other tools
The firewall between the Fed’s swap lines and Treasury’s liquidity diplomacy needs to be maintained and made explicit. The ESF, however, is a different animal and should be used as such. Bilateral liquidity assistance from Treasury through the ESF or other mechanisms is a legitimate instrument of foreign policy. Using it to support allies, to advance strategic objectives, or to provide targeted assistance where the Fed’s mandate doesn’t reach is entirely defensible. The problem arises when the political logic of ESF-style arrangements begins to bleed into the Fed’s decision-making. The discussion of who gets a central bank liquidity swap line needs to happen at the Fed, and not meander over to the White House.
The FIMA Repo Facility should be actively promoted as the appropriate channel for countries like the UAE with substantial Treasury holdings seeking precautionary dollar access. The facility is collateralized, low-risk, and does not require FOMC approval or political negotiation. Countries that qualify should be encouraged to use it, rather than seeking deals that carry political costs on both sides.
Dollars, dollars everywhere
The global financial system is awash with dollars at a scale that is difficult to comprehend. Ever since the extraordinary monetary and fiscal interventions of the Global Financial Crisis and COVID, global markets have grown used to a world where dollars are abundant, accessible, and — crucially — expected. The Fed’s balance sheet went from roughly $900 billion before 2008 to a peak of nearly $9 trillion in 2022 (roughly at $6.7 trillion today).
To extend the gasoline metaphor, the problem facing foreign governments isn’t really whether gas is available, but what gas station they want to patronize and at what cost. We should not halt liquidity diplomacy, that ship has sailed. But to preserve the credibility of the dollar, we must be ruthless about which U.S. institution is providing liquidity assistance and why. The ESF is Treasury’s tool of choice — Treasury’s leadership changes with administrations and its choices should reflect foreign policy. Congress can always allot it more funds. But the Fed’s swap lines are a hegemonic stabilizer that no other central bank is willing or able to offer. Yes, there is a question of whether the Fed should revisit its swap line criteria to include systemic dollar users, but otherwise it needs to protect swaps from every attempt to turn them into a political bargaining chip thrown casually.2
China is the obvious counterexample, but it is both an adversary and holds a lot of dollar liquidity in reserves (i.e. they could probably solve a dollar liquidity crunch themselves)
This is a must-read to understand the systemic role and the political leverage of dollar liquidity. Thank you
FT
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 big global central banks in the Eurozone, the UK, Switzerland, Japan and Canada.
Iran war has exposed the weakness of the dollar
A pile of U.S. dollar banknotes, with a one-dollar bill prominently displayed in the center.
When foreign central banks are given special dollar liquidity privileges in the form of swap lines, the US typically holds the foreign currency. In return, the foreign central bank avoids financial firms under their jurisdiction selling off assets or failing to meet their dollar obligations. That prevents a risk of contagion and global panic.
The Fed also has a backstop in place — the so-called Foreign and International Monetary Authorities, or FIMA, repo facility — that enables foreign countries to use their holdings of US Treasury securities to access short-term dollar funding, without having to sell their Treasury holdings.