This has confused many market observers who quite rightly think of the UAE as a dollar-rich sovereign, and hence don’t understand why it should need dollar liquidity.
As ever, there is a tremendous amount of confusion surrounding the dollar swap line topic. For instance, during a CNBC interview with President Trump, Joe Kernan failed to grasp the mechanics of the situation, mistakenly assuming that swap lines are substitutable with standard credit lines. They are not. Swap lines are highly specific mechanisms, and they are also distinct from swap arrangements with the US Treasury’s Exchange Stabilization Fund (ESF) such as those arranged last year with Argentina — which, if anything, were primarily designed to help Argentina withstand the pressure to accept Chinese swap lines.
Understanding what is going on, however, requires more than textbook smarts. It requires grappling with multiple moving parts — including geopolitics — as the system moves to establish a new stability-minded financial protocol that befits a quantum, fusion, and AI-based world.
The true war in that sense is over whose swap lines will prevail in the new financial architecture.
For now, the U.S. retains the advantage because — despite all the propaganda out there about the rise of the yuan — only the dollar meets the requirements that can underpin such a world (at least, if we don’t want to undermine individual property rights).
As a result, it is the United States that holds the power to use swap lines as geopolitical and statecraft tools to enforce the system reboot that it desires.
This, however, is unsettling for allies who are ideologically opposed to falling in line with a Trumpian American agenda just to benefit from continued access to swap lines.
As one of the preeminent experts on eurodollars and swap lines, Robert McCauley has long warned that the potential weaponization of swap lines is an especially acute concern and source of panic for Europe. Europe holds deeply entrenched, outstanding US dollar liabilities that trace back to the Marshall Plan and the Eurodollar markets of the 1960s and 70s.
For now, the Trump administration’s economic team is quietly signaling that the weaponization of swap lines against Europe is an unthinkable last resort, and thus mostly an unjustified concern.
If that’s the case, it wouldn’t be the first time Europeans have fanned paranoia about over-dependency on US systems to push domestically motivated agendas more quickly through their legislative machine. As I pointed out on X, the ECB’s Piero Cipollone, a big advocate of central bank digital currencies, admitted as much in a conversation with PIIE’s Nicolas Veron on Wednesday with respect to the digital euro.
But to truly appreciate the gravity of swap lines, we must look back to the global liquidity ramifications of the 2008 financial crisis. As the crisis unfolded, most media missed the significance of the unprecedented central-banking liquidity operations underway.
I know this for a fact because I was a witness to how the crisis was processed in both the CNBC and FT newsrooms.
I recall with some detail CNBC anchorman Geoff Cutmore’s look of bewilderment when I first raised the topic of the Fed balance sheet with him.
By the peak of the crisis, I had sensed that central bank balance sheets would soon inevitably become a thing. In October 2008, just as I was leaving CNBC for the FT, I went to great lengths (laborious data entry from Fed filings by my own hand) to render the knowledge gap into a lighthearted joke in my goodbye email.
Here’s the note I sent:
But for the most part I was a lone voice.
Even beyond newsrooms, few individuals (aside from high-level academics and central bankers) understood what was really going on with the plumbing. Zoltan Pozsar, with his famous shadow banking diagram, was a rare exception in the public and analyst domain.
I will forever remember a meeting I had with him at a Royal Exchange cafe about a year or so after the crisis, during which I suggested that swap line interventions were arguably the most important central bank actions of the era. He emphatically agreed, expanding even more eloquently on the point.
At this point readers might naturally ask: why should anyone trust a random journalist with an Ancient History degree to have more insight on these matters than many notable finance professionals?
That is not an easy thing to answer. For the most part, much of my understanding stems from raw intuition and a weird capacity to triangulate the system in real time. Often, I don’t know how I know these things. I just do. At a minimum, I know where to look for the information I need to fill the blanks or to course-correct for incorrect assumptions.
The outcome is a mental model that handles complexity with relative ease and which, for the most part, has a strong track record for spotting emerging trends. That, more than anything else, is probably what has earned me whatever reputation I have. That’s not to suggest I don’t get things wrong, especially when overwhelmed by too many conflicting inputs. But by and large, I see systems where most others see only isolated lines of cause-and-effect.
The key point, though, is that this understanding doesn’t come from any classical academic training in economics. It comes instead from a kind of intellectual osmosis — driven by journalistic curiosity and an ADHD-wired brain that naturally absorbs peripheral information and sees patterns others often miss. Add to that years of obsessive, self-taught sleuthing into the mechanics of the financial system, plus repeated proximity to insiders who actually know what’s going on, and you begin to understand where my insight, if any, stems from.
It’s from that foundation that I conclude the UAE’s current situation is so vital.
Brad Setser has stressed the UAE’s abundant dollar-denominated assets ensure the sovereign is very far from going broke.
But this, I’d argue, is the wrong way to view the problem.
A much better way to approach this is to view them through the lens of bank resolution and insolvency.
This is because fundamentally the same logic that applies to failing banks also applies to sovereigns in stress. And much like Credit Suisse in its final days, the UAE is asset-rich and fundamentally solvent but not necessarily liquid.
In practice, that means the country’s capacity to turn long-term claims over future goods and services into access for such resources today is currently being stretched.
That in turn — due to the scale of the liquidity demand at hand — risks destabilising the wider system.
Realistically, there are only three highly problematic ways for the UAE to generate the dollars it needs.
First, it could print its own currency and channel that liquidity to local entities, who would then swap it for dollars in the open market. But this would dilute the dirham against the dollar and effectively kill the peg. That matters because trust in the UAE’s financial system is deeply intertwined with the stability it imports through its dollar peg.
Second, it could sell its dollar assets in a cumbersome fire sale. This option risks destabilising the global market for dollar assets at a time when markets are already precarious.
Third, it could repo its dollar assets — borrowing dollars by temporarily pledging high-quality collateral. While cleaner than an outright sale, this route is still limited in scale, carries rollover risk, and, if done aggressively, can push up SOFR (the Secured Overnight Financing Rate) in ways that would unhinge interest rates from Fed policy and thus likely draw unwanted intervention from the central bank anyway.
None of these paths is attractive for either the UAE or the broader global dollar system.
The US thus has a clear interest in granting the UAE access to dollar swap lines to monetize and maintain its financial system in balance.
Yet the proposal is also understandably controversial.
When the Federal Reserve first introduced dollar swap lines in 2007 — initially with the European Central Bank and the Swiss National Bank, then expanding them slowly through 2008 to include the Bank of Japan, Bank of England, Bank of Canada, and later central banks in Australia, Sweden, Denmark, Norway, New Zealand, Brazil, Mexico, South Korea, and Singapore — it was widely seen as extending dollar liquidity far beyond its traditional remit.
For many observers, the move signaled that the Fed had effectively become the global lender of last resort to foreign banking systems. This understandably sparked domestic unease about the United States supporting overseas institutions and stretching its domestic mandate without proper political oversight.
Equally contentious, however, was the idea of extending the full benefits of the US financial system — its backstops, guarantees, and implicit safety net — to foreign populations and institutions that are not subject to the same laws, regulations, and standards. Such an arrangement, after all, is inherently vulnerable to exploitation and, many argue, fundamentally not in America’s long-term interest.
Nonetheless, the move was justified on the grounds that the Americans could not afford to let the wider system collapse. The contagion was so systemic, the reasoning went, that it risked pulling the United States down along with everyone else.
Even so, American central bankers still took care to structure the international liquidity provision in ways that clearly favoured trusted allies over adversaries or sovereigns operating outside American influence and the rules-based system. The swap lines were intentionally limited to friends.
It wouldn’t be until August 2009, following public interventions by George Soros and Peterson Institute’s Ted Truman in March of that year, that efforts would be taken to extend dollar liquidity to non-allies.
Notably, this did not come in the form of direct Fed swap lines. Instead, the proposal involved a one-off dilution of the IMF’s special drawing rights allocations. In retrospect, it is probably noteworthy that China was among the strongest advocates for the move. Veteran IMF officials, such as Onno de Beaufort Wijnholds, on the other hand, strongly opposed such a dilution. His letter to the FT on the matter (the link is now dead) can be seen below:
[Curiously, many of the original links to these important statements have since gone dead — including those by the PBOC’s Zhou Xiaochuan that I referenced in my original FTAV article.]
A similar extension of SDR liquidity was granted in 2021, following the COVID crisis. One would assume a renewed round of SDR issuance to help manage the fallout from the current Iran-related tensions would therefore also make sense.
Yet, it’s unlikely that Trumpian America will be as obliging, not least because — as the largest lender in the system — any dilution of the SDR system comes mostly at America’s expense.
Since no such extension can occur without explicit American consent — or, more specifically, the approval of Treasury Secretary Scott Bessent — that leaves only one realistic path for managing dollar liquidity shortfalls: direct bilateral negotiations with Washington for dollar swap lines.
In this way, Washington’s capacity to determine who should — and who should not — receive access to dollar liquidity has become one of the highest-stakes games in modern geopolitics.
Extending these facilities is especially delicate when dealing with countries whose long-term commitment to the rules-based order is not yet fully proven.
This is why the UAE’s request, and whatever concessions Washington demands in return, is likely to go down as a textbook example of modern financial statecraft in play.
Europeans, in particular, will be watching the US-UAE negotiations with keen interest. If Washington can extract meaningful concessions even from a wealthy, dollar-flush sovereign like the UAE, it sends a clear warning to every nation with a more fragile external position.
But the broader signal is even clearer: the UAE is not turning toward the yuan. It is doubling down on the dollar system.
The new rules of the game, therefore, are brutally simple: if you refuse to accept American standards and rules, you will not be granted entry into the dollar tent. And if you are outside that tent, America will no longer risk its capital, credibility — or military power — to defend your property rights in a world where predatory forces are rising up.
The choice, as they say, is yours.
