NPR. This is The Indicator for Planet Money. I'm Adrian Ma. And I'm Paddy Hirsch. The United Arab Emirates, one of the wealthiest of the Gulf states and home to the vaunted city of Dubai, has requested something called a currency swap line from the U.S. And it's not just the UAE. Treasury Secretary Scott Besson said a number of allies in the Gulf region and in Asia have requested swap lines. Although he did not say which those countries are. He said they would need those lines, that access to U.S. dollars, to help deal with energy shocks, another fallout from the Middle East war. He also said the U.S. would benefit from providing a swap line to the UAE. Now, there's some talk that the UAE's withdrawal from the OPEC cartel this week might have been part of a swap line deal, but that hasn't been confirmed. And we've talked about currency swap lines on the show before, like the one the U.S. extended to Argentina last year. But on today's show, we'll explain just how currency swap lines work and why the UAE and maybe some other countries might need them. That's all coming up after the break. A currency swap is, well, it's just what it sounds like. One country or a country's central bank swaps a chunk of its currency for another currency. So in this case, if President Trump approves this swap line to the United Arab Emirates, the U.S. would swap a certain amount of dollars for UAE Durham's for a certain period of time, but probably not right away. Rachel Ziemba is an economic risk specialist and a senior fellow at the Center for a New American Security. So typically a swap line works that there is an option to draw on the liquidity rather than one needs to. Liquidity, the ability to turn on the dollar tap and make that money flow. The US has extended that privilege via currency swap lines many times in the past, including of course to Argentina last year It extended lines to 14 countries during the 2008 financial crisis but not all of them needed to use the U dollar faucet Just having the option was enough In a sense the symbolic nature and additional liquidity provided by knowing that it existed provided some solace to banks and other institutions that there would not be shortages of foreign currency liquidity. Currency swap lines are like backstops, in other words. And it's not just the U.S. that offers them. China is a big provider. The UAE itself recently extended a currency swap to its neighbor, Bahrain. The swap lines are there to give the recipient access to an alternative means of spending if things happen to go awry in their economies. So how do they work? Well, imagine you have a niece who's about to go to college in the US. She's got some dollars for spending money, but actually most of her savings are in Bitcoin. Bitcoin? Yeah. Well, don't ask. Yeah, okay, well, that's tough because Bitcoin, not necessarily easy to use on a college campus. You're not going to use that at the diner or probably not going to buy beer with it. It's also really volatile. I guess if she ran out of money in her first quarter, she could try to sell some Bitcoin. But who knows what the rate could be by then or how easy it would be to trade it if Bitcoin collapsed. Yeah, exactly. There's a lot of risk. But she can offset that risk by asking me for a currency swap line. So I'll give her the option to take five grand US of my money in exchange for a certain amount of her Bitcoin at any time during the first quarter. If the quarter ends and she's okay for cash, the option just expires, right? Yeah. But if she burns through money halfway through the quarter, then she can exercise that option. So that would mean I deposit $5,000 into her bank account and return, I get 0.000013 Bitcoin or whatever rate we agree on. And that could be the rate on the day of exchange or the rate on the day the line is offered. It depends. And that's the thing about currency swap lines. Every one is bespoke with different terms. That's right. And they all last different terms, too. After a certain period, we're going to have to swap our currencies back Dollars for Bitcoin And depending on the terms she may have to pay interest on that 5k that I effectively lent to her during that time But the important thing for her is that she has access to that 5k if and when she needs it The important thing for me is that I'm guaranteeing dollar liquidity, the ability to access dollars to one of my favorite nieces should the need arise. Are you saying the UAE is like one of America's favorite nieces? Well, maybe not nieces, but as Rachel Ziemba says, it is definitely a valued ally. The UAE has been one of the biggest investors in the United States. They continue to pledge that they'll make good on their pledge to invest, I think, $1.4 trillion. There's also projects the UAE, members of the royal family or even government actors have gotten involved with those close to members of the Trump administration. I'm thinking about digital assets, agreements and the like. The UAE is a large buyer of U.S. weapons. And the UAE, of course, is one of the few countries in the Arab world that is signatory to the Abraham Accords that were negotiated in the first Trump administration. The Abraham Accords were a diplomatic, economic, and security treaty signed between Israel and several Arab nations. So the UAE is a pal. And it's not what you'd call desperate for help, or at least not right now. It's exporting enough oil through its pipeline to keep its head above water. On paper, the UAE seems to be in great shape. The UAE is a country that has over $2 trillion in foreign currency assets, has $300 billion in central bank reserves. In other words, the UAE has a ton of dollars to hand, but a lot of them are owned by foreign investors and residents who could withdraw at a moment's notice if they get wigged out by the way the war is going and decide to get out of the Gulf. Which is not beyond possibility. The Financial Times reported that 30,000 Brits alone have left the UAE since the beginning of the war. And more could follow. If they take their money with them, it could put pressure on the UAE Central Bank and the Durham. Now there no clear evidence right now that the UAE is facing capital outflows of that magnitude But nonetheless as a sort of liquid market this is something they worried about The UAE feels like it might just need a backstop. And that's part of the reason that it's asking for this currency swap line. But Rachel says there's another more subtle message buried in the request. It's not so much just about strength of policy. It's about alignment with the U.S. So the UAE, even more than its neighbors, has gone out of its way to signal the U.S. is their preferred partner for AI development. The U.S. is the preferred partner for security. So the UAE is sending this rhetorical message to the United States, and in a way, the swap line would be part and parcel of that. But what about the U.S.? What's in it for America? Rachel says there are a number of reasons why the U.S. would want to help out this way. Helping the UAE could help America. Here in this context, the UAE would be selling dollar assets maybe to purchase other things, maybe even purchase U.S. goods. So you could have a circumstance, which is that the dollar has stabilized and even strengthened a bit. OK, support for the dollar. Cool. Another reason? To keep pressure off our stock and bond markets. After all, the UAE is a big investor in the U.S. It holds treasuries. It holds American shares. So some of the argumentation would be help us so that we don't have to sell those U.S. dollar assets, which might then put pressure on, say, U.S. Treasury markets or U.S. equity markets. All of this is to say that a currency line is a pretty simple thing on the face of it. But like a swan gliding on the water, there's a lot going on under the surface. Hidden signals, subtle reminders, and of course, a healthy pinch of enlightened self-interest. In an invisible hand, you could say. Adam Smith would be proud, Patty. I do hope he would, Adrian. I do hope so. This episode was produced by Cooper Katz McKim and engineered by Robert Rodriguez. It was fact-checked by Sierra Juarez. Cake and Cannon is our editor, and the Indicators are production of NPR.
