Treasury Secretary Scott Bessent spent time late last week softening up Congress for an expansion of dollar swap lines with Gulf allies.
Swap lines, whether it’s from the Federal Reserve or the Treasury, are to maintain order in the dollar funding markets and to prevent the sale of the US assets in a disorderly way.
…the swap line would benefit both the UAE and the US, and numerous other countries, including some of our Asian allies, have also requested them.
US Gulf allies face this issue as their dollar-denominated oil revenues dwindle due to collapsed oil sales.
Most of them have dollar-denominated debt to match:
- Saudi Arabia: $140–160bn
- United Arab Emirates: $120–180bn
- Qatar: $70–90bn
- Bahrain: $40–50bn
- Oman: $25–35bn
- Kuwait: $2–4bn
- Total (rough): $400–500bn
Without the cash flow, they will have to sell assets. And guess where those assets are? Treasuries and US stocks.
In short, Bessent is busy shoring up the petrodollar system so that if the worst-case scenario worsens and dollar liquidity with it, swap lines will be in place to ensure no run on US assets.
Bessent wrote on X:
As President Trump has made clear, the United States Navy will continue the blockade of Iranian ports. In a matter of days, Kharg Island storage will be full and the fragile Iranian oil wells will be shut in. Constraining Iran’s maritime trade directly targets the regime’s primary revenue lifelines. The US Treasury will continue to apply maximum pressure through Economic Fury to systematically degrade Tehran’s ability to generate, move, and repatriate funds. Any person or vessel facilitating these flows through covert trade and finance risks exposure to US sanctions. We continue to freeze the funds stolen by the corrupt leadership on behalf of the people of Iran.
Under Economic Fury, the US Treasury will continue to systematically degrade Tehran’s ability to generate, move, and repatriate funds. Treasury’s Office of Foreign Assets Control is sanctioning multiple wallets tied to Iran – resulting in the freeze of $344 million in cryptocurrency. We will follow the money that Tehran is desperately attempting to move outside of the country and target all financial lifelines tied to the regime.
Once again, the US is openly weaponising its assets against a foreign adversary, as it first did against Russia after the invasion of Ukraine.
Over time, this can only increase the appeal of alternative reserve assets for central banks in countries with even remotely questionable allegiance to the US, which is now everyone.
Over the cycle, gold is the obvious winner, but so is the AUD.
Still, I would not buy either until the war reaches its ultimate crescendo (or average in for now), because both will fall hard if there is another oil price spike that crushes global demand.
