Middle East seeks US-China currency swaps to stabilize exchange rates, suggesting new value for gold.
2026-04-27 18:11:49
Several Gulf states, including the UAE, have initiated consultations with the United States to seek dollar swap arrangements, with the UAE even planning to submit a formal application for financial support, drawing attention from global financial markets.
In simple terms, a swap agreement is an arrangement where central banks of two countries exchange equivalent amounts of their currencies at an agreed exchange rate, while also agreeing to exchange the swapped currencies back at the original agreed exchange rate at a time of 1-3 years or longer, with a small amount of interest paid. Essentially, it is a short-term liquidity assistance between central banks with borrowing and repayment, which is equivalent to each temporarily lending its own currency to the other for use.
As a wealthy country in the Middle East, the UAE possesses substantial US dollar foreign exchange reserves. However, if it fails to manage the anticipated dollar shortage caused by declining oil and tourism revenues, capital may accelerate its withdrawal from the Middle East. Maintaining exchange rate stability will come at a great cost, and if this occurs, it will indirectly affect the hegemony of the US dollar.
This conflict has had multiple impacts on the UAE economy: damage to oil and gas infrastructure has disrupted oil transport through the Strait of Hormuz, cutting off its core source of dollar revenue;
Regional unrest has also severely impacted the tourism industry, plunging another source of hard currency into a slump.
In the short term, the decline in oil and gas sales has exceeded the price effect's ability to offset it. Coupled with the stagnation of tourism and business travel, economic growth and fiscal revenue have both slowed down, while the demand for reconstruction and emergency fiscal expenditures has accelerated. Its impact is comparable to the impact of the pandemic.
Despite the UAE dirham's long-standing peg to the US dollar and its backing by $270 billion in foreign exchange reserves, the risk of capital flight triggered by war and stock market volatility have put pressure on the currency's exchange rate. S&P Global warned in a March report that the prospect of a "potentially prolonged disruption" to oil exports casts a shadow over economic expectations.
Against this backdrop, the US dollar swap line has become a key demand for the UAE.
The Governor of the Central Bank of the United Arab Emirates, Khalid Mohammed Barama, formally proposed the idea of establishing a currency swap mechanism to U.S. Treasury Secretary Scott Bessant and Federal Reserve officials during a meeting in Washington.
Such arrangements not only allow the UAE Central Bank to obtain US dollars at low cost, supporting the exchange rate and replenishing reserves during liquidity crises, but also avoid market turmoil caused by being forced to sell dollar-denominated assets.
It is worth noting that UAE officials have made a veiled statement that if dollar liquidity becomes critical, they may be forced to use alternative currencies such as the renminbi for oil transactions. This implication directly targets the core pillar of dollar hegemony—the dollar settlement system for oil trade—and poses a hidden challenge.
For the United States, this demand is backed by complex strategic trade-offs.
Treasury Secretary Bessant publicly defended the swap line, calling the consultations "routine communication between the Treasury and its partners," and emphasizing that the move "demonstrates the core status of the dollar and the ability of the U.S. economy to safeguard itself," and is a long-term measure to consolidate the dollar's status as a reserve currency and curb the expansion of alternative payment systems.
President Trump also expressed his support, saying, "I will fully support the UAE if it encounters difficulties."
From a mechanism perspective, the Federal Reserve has made large-scale use of swap facilities during the 2008 financial crisis and the COVID-19 pandemic, stabilizing global liquidity through the model of "exchanging dollars for local currency and repurchasing upon maturity";
The Ministry of Finance can also provide alternative arrangements through the Foreign Exchange Stabilization Fund, with the previous $20 billion swap with Argentina serving as a precedent.
UBS economist Paul Donovan points out that the dollar reserves of central banks in the Gulf countries are mostly held in the form of liquid assets such as US Treasury bonds. If they directly use their foreign exchange assets without reaching a swap agreement, it will shake the stability of their currencies' peg to the US dollar.
While the US may make a good show of it, the more than $5 trillion in sovereign wealth funds in the Middle East, though primarily holding dollar assets, are mostly allocated to low-liquidity assets. Short-term liquidation could impact the US market and even trigger a vicious cycle similar to that during the Truss government era in the UK. This highlights the unique value of swap lines as a "non-disruptive liquidity supplement".
Currently, Gulf countries have strengthened their liquidity buffers through multiple channels: the UAE and Bahrain reached a $5 billion swap agreement this month, and many countries have recently raised billions of dollars from institutions such as the Pacific Investment Management Company through private placements to cope with what the International Energy Agency calls the "worst oil supply crisis in history".
However, UBS warns that in the long run, the funding needs for reconstruction and military upgrades may still force countries to consider asset sales.
At the IMF and World Bank meeting in Washington, finance ministers and central bank governors generally agreed that the economic recovery of the Gulf region would not be achieved overnight.
Saudi Finance Minister Mohammed al-Jadaan stated bluntly that even if hostilities cease, the groundwork for resuming tanker dispatch and transportation may continue until the end of June, adding that "anyone expecting a rapid recovery needs to reassess the situation."
Against this backdrop, dollar swap lines not only serve as a wartime financial buffer for Gulf countries, but also as a strategic tool for the United States to maintain dollar hegemony and consolidate regional alliances. Their subsequent developments will continue to influence the global foreign exchange market and energy trade landscape.
Currently, Gulf countries are urgently applying for swap agreements to stabilize their domestic currencies and reduce losses caused by tourism and oil transportation. This also explains why Middle Eastern countries sold gold in the past, which is one of the reasons why gold prices have been weak in the face of geopolitical risks.
This also reveals an objective fact: at critical junctures when countries lack dollar liquidity or are lacking liquidity, gold's ability to quickly convert into cash can help these countries stabilize their currency exchange rates.
In simple terms, a swap agreement is an arrangement where central banks of two countries exchange equivalent amounts of their currencies at an agreed exchange rate, while also agreeing to exchange the swapped currencies back at the original agreed exchange rate at a time of 1-3 years or longer, with a small amount of interest paid. Essentially, it is a short-term liquidity assistance between central banks with borrowing and repayment, which is equivalent to each temporarily lending its own currency to the other for use.
As a wealthy country in the Middle East, the UAE possesses substantial US dollar foreign exchange reserves. However, if it fails to manage the anticipated dollar shortage caused by declining oil and tourism revenues, capital may accelerate its withdrawal from the Middle East. Maintaining exchange rate stability will come at a great cost, and if this occurs, it will indirectly affect the hegemony of the US dollar.
The conflict has severely damaged the Gulf economy, plunging the UAE into a dollar liquidity crisis.
This conflict has had multiple impacts on the UAE economy: damage to oil and gas infrastructure has disrupted oil transport through the Strait of Hormuz, cutting off its core source of dollar revenue;
Regional unrest has also severely impacted the tourism industry, plunging another source of hard currency into a slump.
In the short term, the decline in oil and gas sales has exceeded the price effect's ability to offset it. Coupled with the stagnation of tourism and business travel, economic growth and fiscal revenue have both slowed down, while the demand for reconstruction and emergency fiscal expenditures has accelerated. Its impact is comparable to the impact of the pandemic.
Despite the UAE dirham's long-standing peg to the US dollar and its backing by $270 billion in foreign exchange reserves, the risk of capital flight triggered by war and stock market volatility have put pressure on the currency's exchange rate. S&P Global warned in a March report that the prospect of a "potentially prolonged disruption" to oil exports casts a shadow over economic expectations.
Dollar swap lines: A financial safety net for Gulf countries?
Against this backdrop, the US dollar swap line has become a key demand for the UAE.
The Governor of the Central Bank of the United Arab Emirates, Khalid Mohammed Barama, formally proposed the idea of establishing a currency swap mechanism to U.S. Treasury Secretary Scott Bessant and Federal Reserve officials during a meeting in Washington.
Such arrangements not only allow the UAE Central Bank to obtain US dollars at low cost, supporting the exchange rate and replenishing reserves during liquidity crises, but also avoid market turmoil caused by being forced to sell dollar-denominated assets.
It is worth noting that UAE officials have made a veiled statement that if dollar liquidity becomes critical, they may be forced to use alternative currencies such as the renminbi for oil transactions. This implication directly targets the core pillar of dollar hegemony—the dollar settlement system for oil trade—and poses a hidden challenge.
America's strategic trade-offs: defending dollar hegemony versus alliances?
For the United States, this demand is backed by complex strategic trade-offs.
Treasury Secretary Bessant publicly defended the swap line, calling the consultations "routine communication between the Treasury and its partners," and emphasizing that the move "demonstrates the core status of the dollar and the ability of the U.S. economy to safeguard itself," and is a long-term measure to consolidate the dollar's status as a reserve currency and curb the expansion of alternative payment systems.
President Trump also expressed his support, saying, "I will fully support the UAE if it encounters difficulties."
From a mechanism perspective, the Federal Reserve has made large-scale use of swap facilities during the 2008 financial crisis and the COVID-19 pandemic, stabilizing global liquidity through the model of "exchanging dollars for local currency and repurchasing upon maturity";
The Ministry of Finance can also provide alternative arrangements through the Foreign Exchange Stabilization Fund, with the previous $20 billion swap with Argentina serving as a precedent.
UBS economist Paul Donovan points out that the dollar reserves of central banks in the Gulf countries are mostly held in the form of liquid assets such as US Treasury bonds. If they directly use their foreign exchange assets without reaching a swap agreement, it will shake the stability of their currencies' peg to the US dollar.
While the US may make a good show of it, the more than $5 trillion in sovereign wealth funds in the Middle East, though primarily holding dollar assets, are mostly allocated to low-liquidity assets. Short-term liquidation could impact the US market and even trigger a vicious cycle similar to that during the Truss government era in the UK. This highlights the unique value of swap lines as a "non-disruptive liquidity supplement".
Multiple liquidity buffers: bilateral swaps and private placement financing running in parallel?
Currently, Gulf countries have strengthened their liquidity buffers through multiple channels: the UAE and Bahrain reached a $5 billion swap agreement this month, and many countries have recently raised billions of dollars from institutions such as the Pacific Investment Management Company through private placements to cope with what the International Energy Agency calls the "worst oil supply crisis in history".
However, UBS warns that in the long run, the funding needs for reconstruction and military upgrades may still force countries to consider asset sales.
The road to recovery is long and arduous; will the swap mechanism have a profound impact?
At the IMF and World Bank meeting in Washington, finance ministers and central bank governors generally agreed that the economic recovery of the Gulf region would not be achieved overnight.
Saudi Finance Minister Mohammed al-Jadaan stated bluntly that even if hostilities cease, the groundwork for resuming tanker dispatch and transportation may continue until the end of June, adding that "anyone expecting a rapid recovery needs to reassess the situation."
Against this backdrop, dollar swap lines not only serve as a wartime financial buffer for Gulf countries, but also as a strategic tool for the United States to maintain dollar hegemony and consolidate regional alliances. Their subsequent developments will continue to influence the global foreign exchange market and energy trade landscape.
Currently, Gulf countries are urgently applying for swap agreements to stabilize their domestic currencies and reduce losses caused by tourism and oil transportation. This also explains why Middle Eastern countries sold gold in the past, which is one of the reasons why gold prices have been weak in the face of geopolitical risks.
This also reveals an objective fact: at critical junctures when countries lack dollar liquidity or are lacking liquidity, gold's ability to quickly convert into cash can help these countries stabilize their currency exchange rates.
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