Dollar Supply Tightens, Many Countries Urge US to Open "Emergency Line"

Jakarta, CNBC Indonesia - The United States’ war with Iran is beginning to pressure the world more deeply. Not only through oil prices, inflation, or trade disruptions, but also through the demand for the US dollar.

US Treasury Secretary Scott Bessent stated that many oil-rich US allies in the Persian Gulf region have requested financial support amid economic turbulence caused by the war with Iran. This support comes in the form of currency swap facilities or swap lines.

This statement is significant as it shows that the pressures of war are shifting from energy markets to financial markets. US allied countries are now not only concerned about oil supplies but also about dollar availability.

Previously, the White House told CNBC International that the US has not received an official request from the United Arab Emirates or UAE to open a swap line. However, the White House acknowledged that discussions regarding such facilities have taken place.

Now, Bessent says the requests are coming from many US allies in the Gulf region. He also mentioned that some US allies in Asia have made similar requests, though he did not specify which countries.

What Is a Swap Line?

A swap line can be understood as a way for countries short on dollars to avoid panicking in search of dollars in the market.

In this scheme, a central bank or financial authority of a country can exchange its currency for US dollars. These dollars can then be used to maintain financial system stability, assist banks, or ease domestic exchange rate pressures.

The mechanism involves the Federal Reserve lending US dollars to a foreign central bank at a certain interest rate. The interest rate typically references the overnight index swap (OIS), plus a certain spread.

The dollar loan is secured by the foreign central bank’s currency. So, when the Fed provides dollars, the foreign central bank hands over its country’s currency as collateral. After the dollar loan is repaid, the Fed returns the foreign currency.

It is important to note that credit risk remains with the foreign central bank, not the Fed. This means if the foreign central bank then channels those dollars to banks or financial institutions in its country, the default risk is borne by that central bank.

For example, this occurred at the start of the Covid-19 pandemic. On 18 March 2020, the European Central Bank or ECB drew down US$36.3 billion through the Fed’s swap line. The loan had an interest rate of 0.45% with a seven-day tenor.

This example shows that swap lines are typically used when global markets are under significant pressure. When many parties need dollars simultaneously, this facility helps ensure dollar supply remains available.

This is crucial because the US dollar remains the primary currency in global transactions. Oil, foreign debt, international trade, and much bank financing still use dollars.

Therefore, when war causes market panic, dollar demand usually spikes sharply. Investors seek safe assets, companies need dollars to meet obligations, and countries require dollars to maintain exchange rate stability.

With a swap line, countries under pressure do not have to immediately sell assets en masse to obtain dollars. This is what makes this facility important, not only for recipient countries but also for global financial market stability.

When Dollars Are in High Demand

If many countries request swap lines, the message is clear: demand for the US dollar is surging sharply.

In normal conditions, countries can obtain dollars from exports, foreign investment, loans, or foreign exchange reserves. However, when war and uncertainty rise, dollars are typically sought after more intensely as they are seen as the safest asset.

As a result, other currencies can come under pressure, especially those of emerging markets that rely on foreign capital flows and dollar financing.

The pressure can also spread to funding costs. Banks, companies, and governments needing dollars must pay more to obtain them.

If this situation worsens, countries without access to swap lines may be forced to use foreign exchange reserves or sell dollar assets they hold.

This is where risks to the US emerge. If many countries sell dollar assets simultaneously, including US Treasury bonds, the US bond market could be shaken. Yields could rise, and the US government’s financing costs would increase accordingly.

Therefore, swap lines are not just aid for other countries. For the US, this facility also serves as a tool to prevent global panic from rebounding onto its own financial markets.

The impact can also be seen in the US Dollar Index (DXY). In the early stages, numerous swap line requests could signal that global markets are stressed and dollars are in high demand. This tends to keep the DXY strong or even rising, as investors seek refuge in the US dollar.

As a note, according to Refinitiv data, the US Dollar Index was still around 97.6 before the war began.

However, since the US-Iran war erupted, the DXY has continued to rise, even touching the 100 level. The DXY even rose more than 3% to a 10-month high of 100.64 after the US-Iran conflict triggered a rush for safe assets.

Nevertheless, this strengthening has not moved linearly. As of Friday (24/4/2026), the DXY was trading around 98.8. The US dollar is still heading towards its first weekly gain in three weeks due to stalled US-Iran peace talks and high tensions in the Middle East.

However, the effect of swap lines on the DXY is not always one-directional. If swap lines are actually opened and succeed in calming the markets, the urgent need for dollars could decrease. At that point, buying pressure on the dollar may ease, and the DXY’s rise could be capped.

Why Are Gulf Countries Under Pressure?

Gulf countries, including the UAE, are in a difficult position. On one hand, they need