Over the past week, it’s been reported that the UAE has raised the question of possibly accessing U.S. dollar swap lines, which we immediately argued serves as a clear signal that the country is facing pressure regarding its currency peg.
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.