For decades, the U.S. largely held off on approving currency swaps with foreign powers, save for rare circumstances. When it did, the Federal Reserve would trade currencies to shore up international dollar reserves, including at the height of the 2008 financial crisis. The central bank would also sign off on swap lines to restore confidence in dollar markets and prevent fire sales of U.S. assets, as is what happened in the early days of the COVID-19 pandemic.
But for a foreign government to qualify for a swap line during President Donald Trump’s second term in office, however, the requirements seem to be much more simple. Sometimes, all it takes is being friendly to the president.
Since Trump’s return to office, currency swap lines have morphed from a tool mostly used in crisis situations to a foreign policy instrument, potentially helping favored nations gain faster access to dollar liquidity.
The quick evolution of currency swaps’ role has raised fears that they too might fall victim to politicization, according to an analysis published Monday by researchers at the Peterson Institute for International Economics, an independent nonpartisan research organization. The risk is particularly acute for lines originating from the Federal Reserve, where maintaining independence has been a red button issue as of late.
But the Fed’s credibility is not all that’s at stake, according to the researchers. If foreign governments become convinced promises of dollar liquidity now come with geopolitical strings attached, they might choose to seek more predictable alternatives. By waving its favored currency as a geopolitical incentive for foreign partners, the Trump administration risks squeezing global demand for dollars, and eroding the framework of dollar dominance that has existed throughout the post-war era.
“The president’s nonstop tariff threats display sticks aplenty, but Trump has offered carrots too,” the Peterson economists wrote. “If the supply of nonpoliticized [lender of last resort] services falls, so will the demand for dollars. Governments and markets will retreat from dollar exposure.”
The Federal Reserve did not immediately reply to Fortune’s request for comment.
Institutional split
The U.S. government issues currency swaps to help itself as much as it does so to support allies. Foreign governments turn to a stable supply of dollars as a safe haven asset, while the U.S. relies on swaps to calm panic in global markets and cement the dollar’s role as the world’s primary reserve currency, a status that allows the U.S. to borrow money at cheap rates.
Geopolitical leverage has also been part of the appeal of currency swaps, as the U.S. gets to decide which nations get access to emergency dollar lifelines. But historically at least, currency swaps approved with foreign policy goals in mind were only issued by the Treasury Department’s Exchange Stabilization Fund, a nearly $220 billion portfolio that has long been used by the executive branch to conduct financial statecraft.
Last year, the Treasury tapped this fund when it announced a $20 billion swap framework for Argentina to support President Javier Milei, an ideological ally to Trump who was facing a currency crisis brought on by a spiraling peso and a challenging legislative election.
But the Treasury isn’t the only way the U.S. government can issue currency swaps. The Federal Reserve also has the authority to do so, and because the central bank has the power to create dollars when it decides the economy needs them, it theoretically has a war chest with unlimited capacity to issue greenbacks to countries in need. This flexibility is what allows the Fed to step in as a lender of last resort and backstop when the massive offshore dollar market’s stability comes under threat, as it did in 2008 and 2020.
The Fed is an exclusive partner for a select group of allies. Outside of emergency interventions, the central bank maintains standing swap lines at fixed rates with only five counterparts—the Bank of Canada, Bank of Japan, European Central Bank, Bank of England, and the Swiss National Bank. These lines are called “gold-plated,” are coveted in international finance, and might yet be part of a growing club.
Playing favorites
Last month, the United Arab Emirates announced it was discussing setting up its own currency swap line with the U.S. Scott Bessent, the Treasury Secretary, also signaled in April the U.S. was considering swap line requests from a number of other unnamed countries in the Middle East and Asia. While a deal has yet to be struck, UAE officials have signaled they are angling for a gold-plated line straight to America’s Federal Reserve.
“It is an elite matter. It is not about bailing out,” Thani Al Zeyoudi, the UAE’s trade minister, said at a conference last month. While he didn’t mention the Fed specifically, he listed the five countries the central bank shares gold-plated swap lines with, and suggested the UAE is targeting that level of dollar liquidity.
The Peterson researchers urged the Trump administration to consider this request with caution, given the lack of economic grounds for the Fed to intervene in a wealthy country such as the UAE.
“Establishing a ‘gold-plated’ Fed swap line simply to bolster a favored ally’s sense of prestige—in the absence of even a potential shortage of dollars—would push the US central bank far out of its previously accepted lane,” they wrote.
If the Fed were to welcome another member to its high-flying group, it might raise even more concerns regarding the central bank’s perceived independence. Kevin Warsh, a Trump appointee, has recently taken the reins at the institution, and observers have questioned whether the new chair can keep the Fed insulated from executive branch interventions.
Warsh’s musings on international finance so far would likely do little to inspire confidence among purists. During his Senate confirmation hearing in April, Warsh said while the Fed would remain beholden to independence when it comes to rate-setting, the central bank would collaborate with the Trump administration and Congress on “non-monetary matters,” including economic statecraft.
“Fed officials are not entitled to the same special deference in areas affecting international finance, among other matters,” he said.
If the Fed is perceived as weighing the merits of swap lines based on politics and foreign relations, it could severely undermine the dollar’s global status, the Peterson researchers warned, urging swaps on geopolitical grounds to remain strictly under the purview of the Treasury’s limited fund. The alternative could be more muddling in the central bank’s affairs, and yet another blow to the Fed’s fragile credibility.
“The red line that compromises central bank independence when crossed is for the Treasury effectively to commandeer the Fed’s balance sheet,” the researchers wrote.
