When the UAE threatened to use Chinese currency if it was not given currency swap lines, it was seen as a credible logistical alternative rather than a simple bluff due to existing financial ties with China. The UAE already shares a $4.9 billion (25 billion Yuan) currency swap agreement with China until 2028. Amid economic fragmentation, broader conflict in West Asia, rising oil prices, appreciation of the dollar index, and the potential reorganisation of global economic and financial activity, the stealth erosion of the dollar as global financial reserve has been overlooked. The global use of the dollar as the reserve currency was at 56.32 per cent at the end of Q2 2025. However, the decline of the dollar in global reserve currency has not been accompanied by a rise in the other three among the “big four”-euro, yen, and pound. Rather, it was captured by nontraditional reserve currencies, including the Australian dollar, Canadian dollar, Chinese renminbi, South Korean won, Singaporean dollar, and the Nordic currencies. Now, as US President Donald Trump is heading to Beijing for the Trump-Xi summit, the tension feels palpable, as China continues to use currency swap lines, with over 40 developing countries, to promote the use of its currency, the Renminbi.
What are currency swap lines, and how does it work?
The currency swap lines are traditional tools that use the exchange of currency between the central banks of two nations, including the dollar, to ensure liquidity in a crisis. The US Federal Reserve will offer dollars to a foreign country’s central bank, which in turn offers a comparable amount of its currency. The Foreign Central Bank then disburses it to its banks. When the crisis is over, the banks will return the dollar to their central bank along with a fee and then the central bank will return the dollar along with a fee to retrieve currency from the Fed. However, there is an exclusive group of central banks that hold permanent, standing US dollar liquidity swap lines called the “elite club”, which is often referred to as C6, which forms the backbone of this dollar-dominated financial architecture. These Central Banks include the European Central Bank, the Bank of Japan, the Bank of England, the Bank of Canada and the Swiss National Bank.
When the US Treasury Secretary Scott Bessent announced the potential for a US-UAE currency swap line, and similar arrangements with US allies in the Gulf and Asia, the move was seen as a potential to ease strains in the global financial market following the US tensions. It was baffling for many, as the UAE, which has more than $2 trillion in sovereign investment assets and whose central bank holds more than $300 billion in foreign currency reserves, was seeking currency swap lines. The US Treasury Secretary Scott Bessent called these a “financial shield” and the strength of the US dollar primacy. The tool dates back to the 1960s and has been used to stabilise the Mexican economy in the 1980s. The peak usage was in 2008 during the financial crisis, $580 billion, and again during the COVID- 19 crisis, roughly $450 billion in dollar swap lines were used. In any situation where there is a liquidity crisis, the US Federal Reserve uses this as a fire extinguisher and keeps the demand and trade concentrated around the dollar.
