Commerzbank’s Michael Pfister discusses how US allies in Middle East and Asia are seeking Dollar swap lines as conflicts curb energy exports and tourism. He notes that US Treasuries held by these allies could be sold if liquidity tightens, and that Treasury-based support via the Exchange Stabilisation Fund may prove insufficient if the Iran conflict drags on, potentially challenging the Dollar over time.

Swap line options and Dollar implications

“On Wednesday, US Treasury Secretary Scott Bessent addressed US senators, noting that several allies from Asia and the Middle East had requested currency swap lines from the US government. The reason is likely clear: US allies in the Middle East, in particular, have suffered a double blow from the conflict.”

“The reason for the US’s interest in helping these countries is also clear: US allies in the Middle East hold significant amounts of US Treasuries, partly because their currencies are pegged to the US dollar. They might have to sell these in the event of a liquidity shortage.”

“Since the financial crisis, the Fed has stepped in to assist other central banks with swap lines on several occasions when dollar liquidity has become scarce on international markets. It even has a standing liquidity line with the major G10 central banks, although this has seen little use since late 2020.”

“A more likely option would be for liquidity to be provided through the US Treasury. A recent example of this approach is the Argentine swap line, through which the US government provided the country with $20 billion. The government fund used for this purpose, the Exchange Stabilisation Fund, currently has a volume of roughly $219 billion. It would certainly be feasible to make this available to US allies, possibly in exchange for the USTs they hold as collateral.”

“$219 billion is significantly less than the amounts made available by the Fed through its lines at peak times ($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 sum might not be sufficient. In that case, other creative solutions would need to be found.”

“For now, at least, the impact on the US dollar is likely to remain limited, until more specific details of US support become clearer, such as which countries are participating and what the scope of assistance is. In the medium term, however, this could certainly become problematic, even if it merely reinforces existing doubts about the US dollar. The fact that US allies in the Middle East are already exploring the possibility of seeking support after barely two months shows that this war is becoming increasingly difficult for them.”

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