Commerzbank’s Michael Pfister discusses how U.S. allies in the Middle East and Asia are seeking dollar trade lines as conflicts limit energy exports and tourism. It notes that U.S. Treasuries held by these allies could be sold if liquidity tightens and that Treasury support through the Exchange Stabilization Fund may prove insufficient if the Iran conflict drags on, which could pose a challenge for the dollar over time.
Swap Line Options and Dollar Implications
“On Wednesday, U.S. Treasury Secretary Scott Bessent addressed U.S. senators, noting that several Asian and Middle Eastern allies have asked the U.S. government for currency swap lines. The reason is likely clear: U.S. allies in the Middle East, in particular, have suffered a double blow from the conflict.”
“The reason for the United States’ interest in helping these countries is also clear: U.S. allies in the Middle East hold significant amounts of U.S. Treasuries, in part because their currencies are pegged to the U.S. dollar. They may be forced to sell them in the event of a liquidity shortage.”
“Since the financial crisis, the Fed has stepped in several times to help other central banks with swap lines when international markets have run out of dollar liquidity. It even maintains a permanent liquidity line with the major G10 central banks, although it has done little good since late 2020.”
“A more likely option would be to provide liquidity through the U.S. Treasury. A recent example of this approach is the Argentine Swap Facility, through which the U.S. government injected $20 billion into the country. The government fund used for this purpose, the Exchange Stabilization Fund, currently has a volume of about $219 billion. It would certainly be possible to make this available to U.S. allies, perhaps in exchange for the UST they hold as collateral.”
“$219 billion is significantly less than the amounts the Fed made available through its line at peak periods ($550 billion in 2008 and $450 billion in 2020). If the conflict in Iran drags on for too long, or if too many allies face liquidity shortages, this amount may not be enough. In that case, other creative solutions will need to be found.”
“At least for now, the impact on the U.S. dollar is likely to remain limited until more specific details of U.S. support become clear, such as which countries are participating and the scope of assistance. However, this could certainly become problematic in the medium term, even if it only reinforces existing doubts about the U.S. dollar. The fact that U.S. allies in the Middle East are exploring the possibility of seeking support after just two months shows that this war is becoming increasingly difficult for them.”
(This article was created with the support of an artificial intelligence tool and has been reviewed by an editor.)
