US
Pushes Swaps to Provide Dollars to Partners and Counter Yuan Proliferation
As the government has been devising plans
to keep the dollar dominant, China has been making its own moves to increase global
influence of the renminbi.
·
Concerns over rising US debt and Washington’s
frequent use of financial sanctions have increased doubts among some countries
about reliance on the US dollar.
·
As a result:
o
demand for gold has risen,
o
more oil trades are being conducted in
cryptocurrencies and China’s renminbi,
o
and China is pushing wider international use of its
currency.
US Pushes Dollar Protection Strategy
·
The Trump administration is discussing currency
“swap lines” with allies in the Gulf and Asia to reinforce the global role of
the US dollar.
·
Currency swap agreements allow countries to access
US dollars directly in exchange for their own currencies, helping stabilize
trade and financial transactions.
·
These arrangements are aimed at reducing incentives
for countries to use the renminbi in oil and trade transactions.
·
Scott Bessent has been leading discussions with
countries including the United Arab Emirates.
·
Bessent described swap lines as part of America’s
“economic shield” to strengthen dollar dominance and counter alternative
payment systems.
Growing Concern Over Renminbi Expansion
·
China has expanded its own currency swap network
through the People’s Bank of China since 2009.
·
According to the Council on Foreign Relations,
China now has bilateral swap agreements with more than 40 countries.
·
Beijing uses these arrangements to:
o
support developing countries,
o
increase renminbi usage,
o
and reduce dependence on the dollar-based financial
system.
Gulf and Asian Nations Become Strategic
Battleground
·
Gulf countries affected by disruptions around the
Strait of Hormuz are becoming increasingly important in the competition between
the dollar and renminbi.
·
The UAE said it is interested in swap lines mainly
to deepen trade and investment ties with the US rather than because of
financial distress.
·
Washington fears oil exporters could increasingly
price oil sales in renminbi instead of dollars.
Debate Over US Financial Strategy
·
Critics argue the Trump administration may be
politicising financial tools traditionally used only during crises.
·
Last year, Bessent used a US$20 billion financial
package to support Argentina and its president Javier Milei.
·
Some analysts warn broader use of the Treasury’s
Exchange Stabilization Fund could undermine its credibility as a
market-stabilization mechanism.
Dollar Still Dominates Globally
·
Despite growing interest in alternatives, experts
say the US dollar remains firmly dominant:
o
it still accounts for the majority of global
foreign exchange reserves,
o
and many international transactions continue to
rely on dollar settlement.
·
Analysts also note that countries accepting payment
in renminbi often must offer discounts compared with dollar-based trade.
·
Some economists argue Washington may be overstating
the immediate threat to dollar dominance.
·
Nevertheless, the currency competition increasingly
reflects the broader geopolitical struggle between the US and China over trade,
finance and global influence.
[ABS News Service/12.05.2026]
The
summit between President Trump and China’s top leader, Xi Jinping, in Beijing this
week is likely to include tense discussions about tariffs, Taiwan, Iran and sanctions.
But simmering below the surface is another battle between the United States and
China: an intensifying currency war.
Concerns
about America’s mounting debt load and its aggressive use of sanctions to cut adversaries
off from the Western financial system have raised doubts about the safety of the
dollar as the world’s reserve currency. Those fears have led to growing demand for
gold and increasing numbers of oil transactions using cryptocurrencies or China’s
currency, the renminbi. An erosion of the dollar’s dominance would be a problem
for the U.S. economy, but in recent weeks America has been taking steps to shore
up the currency’s pre-eminence.
At
the heart of that strategy has been discussions between the Trump administration
and several nations in the Gulf and Asia about the possibility of the United States
offering currency “swap” lines. The agreements, which could be run through either
the Treasury Department or the Federal Reserve, would essentially ensure that American
allies have sufficient supplies of U.S. dollars, reducing the need for them to conduct
business with renminbi or other currencies.
With
a currency swap, the United States purchases another country’s currency, giving
that country more dollars for handling oil sales transactions.
The
Federal Reserve generally administers swap lines, which historically have been created
to ease market pressures during periods of global financial turmoil that could threaten
the U.S. economy.
“Currency
swap arrangements have become a tool with both symbolic and strategic significance
in the contest for currency dominance and geopolitical influence,” said Eswar Prasad,
a Cornell University professor and a former head of the China division at the International
Monetary Fund. “The Trump administration’s eagerness to extend currency swap lines
to U.S. allies in the Gulf is clearly intended to protect those countries from the
fallout of the war in Iran while also sidelining China from playing a major role
in the region.”
Treasury
Secretary Scott Bessent, who is traveling to Japan and South Korea before joining
Mr. Trump in China this week, has been leading the talks over the currency swaps.
At
a Senate hearing last month, Mr. Bessent said he discussed a currency swap with
the United Arab Emirates, an oil-rich ally that has been contending with economic
fallout from the war in Iran. The Treasury secretary explained he supported the
idea to maintain order in the dollar funding markets and prevent the sale of the
U.S. assets in a disorderly way.
Historically,
extensions of swap lines were reserved for times when U.S. allies such as Mexico
were facing economic turmoil. While Gulf nations have been struggling given the
disruption of oil exports at the Strait of Hormuz, nations such as the U.A.E. continue
to be on solid economic footing. However, the Treasury Department also has the power
to act unilaterally, creating swap lines of its own by purchasing foreign currencies.
In
a post on social media, Mr. Bessent made clear that his intentions go beyond propping
up favored nations. He described swap lines as a way to
strengthen America’s “economic shield” by reinforcing use of the dollar. The United
States has been concerned that oil exporters such as the U.A.E. could conduct oil
export transactions in renminbi rather than dollars (as Iran has already been doing
for some sales).
“Extending
permanent swap lines can be a major first step in creating new U.S. dollar funding
centers in the Gulf and Asia,” Mr. Bessent wrote. “Dollar
dominance and reserve currency status are strengthened by constant long-term initiatives,
including countering the growth of problematic, alternative payment systems.”
A
U.A.E. official said last week that it was interested in a swap line not because
it needed a bailout but rather to deepen trade and investment ties with the United
States.
But
the United States has been using economic carrots more creatively in the second
Trump administration. Last year Mr. Bessent offered a $20 billion lifeline to Argentina
to stabilize its economy and help boost the political fortunes of its president,
Javier Milei.
Mr.
Bessent’s use of the fund to aid Argentina garnered criticism from skeptics who said that the Treasury secretary was politicizing
a tool that was intended to promote financial stability. But that lifeline was ultimately
repaid and Mr. Milei’s party avoided a rebuke in midterm elections.
As
the United States has broadened use of such financial tools, China has also been
extending more swap lines in recent years. According to the Council on Foreign Relations,
which tracks global swap lines, China has signed bilateral currency swap agreements
with over 40 countries since 2009. It uses the lines, offered through the People’s
Bank of China, as a way to lend to developing countries and promote wider use of
its currency.
The
United States has six active swap lines that run through the Federal Reserve. They
operate with major U.S. trading partners and help smooth transactions between financial
institutions. During the pandemic, the Fed temporarily expanded its swap lines to
include Brazil, Australia, Denmark, Norway, Sweden, South Korea, New Zealand and
Singapore.
It
is not clear if the new lines under discussion would be initiated through the central
bank or through the Treasury’s Exchange Stabilization Fund, a pot of money that
Mr. Bessent has discretion over how to deploy. Kevin Warsh, Mr. Trump’s pick to
be the next Fed chair, has said that he wants closer coordination between the central
bank and Treasury as it relates to international finance.
Mark
Sobel, a former Treasury official, said that introducing more U.S. swap lines to
counter China was misguided. That’s because, he said, Chinese swap lines are opaque,
carry high interest rates and have not been successful at addressing the challenges
of internationalizing the renminbi. However, he suggested that using the Exchange
Stabilization Fund as a political tool could cause more problems than it would solve,
eroding its use as way to stabilize markets.
Doing
so, Mr. Sobel said, would “plunge the E.S.F. into new terrain, may well rest on
dubious thinking and could open a can of worms.”
Despite
the growing interest in alternative currencies and payment systems, it does not
appear that the dollar will be unseated as the world’s reserve currency anytime
soon. The greenback continues to make up a majority of the foreign exchange holdings
in the world’s central banks. And even Iran is negotiating to have the United States
ease sanctions it has placed on the country so that it can conduct more transactions
with dollars.
“I
think the Trump administration has inflated a nonexistent
threat,” said Brad Setser, a fellow at the Council on Foreign Relations.
The
additional U.S. swap lines, Mr. Setser argued, serve little purpose because the
demise of dollar dominance is not imminent. He noted that oil exporters are forced
to offer discounts when they accept payment in China’s currency.
“The
U.S. should not allow other countries to wind us up with unrealistic threats that
they are going to shift to an economic relationship with China that is to their
disadvantage,” he said.