A longstanding, often-overlooked pillar of global financial stability—the Federal Reserve’s network of central bank swap lines—has recently drawn renewed scrutiny from foreign officials.
Concerns are rising that a second Trump administration might politicize or even dismantle these arrangements, undermining a critical safety net underpinning the international dollar system.
While the Fed has not altered its policies, European policymakers and banking institutions are evaluating the potential for a strategic shift, particularly in light of the Trump administration’s historical willingness to reinterpret global financial norms to achieve its economic objectives. Wealth managers and RIAs with international exposure, especially those managing assets for clients invested in global credit or multinational fixed-income portfolios, should consider the systemic implications of such a policy pivot.
What Are Fed Swap Lines—and Why They Matter
Swap lines are bilateral arrangements that allow foreign central banks to obtain U.S. dollars from the Federal Reserve during times of stress. These facilities, widely expanded during the 2008-2009 financial crisis and reactivated at the onset of the COVID-19 pandemic, are crucial tools to prevent liquidity shortages in dollar-denominated funding markets overseas.
Their primary function is stabilization, not stimulus. By supplying dollars to trusted counterparties like the European Central Bank, Bank of Japan, or Bank of England, the Fed helps maintain credit availability worldwide—supporting both foreign and U.S. markets. These lines indirectly sustain demand for dollar assets, preserve funding channels for U.S. corporations operating abroad, and help safeguard the value of U.S. Treasuries held by foreign buyers.
Despite their technical nature, swap lines also carry implicit geopolitical weight. Scholars and central banking veterans increasingly view them as financial instruments with national security implications—reinforcing diplomatic alliances and global confidence in the U.S. financial system.
The Trump Administration’s Potential Reframing
Former President Donald Trump’s economic team has historically taken a more transactional, unilateralist view of financial policy. While the Fed is independent, the administration's influence over financial diplomacy—and the political environment surrounding swap line renewals—could grow significantly under a second Trump term.
The risk? Trump officials may reinterpret the swap line network not as a stabilizing force for global finance, but as leverage in trade or capital account negotiations.
This perspective runs counter to core U.S. economic interests. Restricting swap access would encourage foreign governments to accumulate dollar reserves as a form of self-insurance, reinforcing imbalances that the Trump administration claims to oppose—specifically the persistent U.S. trade deficit.
The Capital Account Paradox
Here’s the macroeconomic contradiction: the U.S. current account deficit (driven in part by a trade gap) is financed through foreign capital inflows. While Trump’s trade policy has focused on reducing imports via tariffs and reshoring supply chains, some of his advisors have suggested going further—possibly limiting foreign capital inflows to narrow the deficit from the other side of the ledger.
Stephen Miran, former senior advisor to the Treasury and briefly chair of the Council of Economic Advisers, floated the idea of capital account restrictions before walking back the suggestion. Robert Lighthizer, former U.S. Trade Representative, has also signaled openness to such measures.
But cutting off sources of financing for the trade deficit—especially official foreign purchases of U.S. debt—while simultaneously discouraging swap lines could set the stage for a liquidity squeeze or higher borrowing costs.
Why Reserve Accumulation Happens—and Why It Matters
The modern habit of accumulating vast dollar reserves among East Asian central banks has its roots in the 1997 Asian Financial Crisis. During that crisis, several nations learned a painful lesson: they could not print dollars to fight capital flight. As economist Martin Wolf has explained, the aftermath created a new orthodoxy—run persistent current account surpluses and build dollar war chests.
This phenomenon, which has helped fund U.S. deficits, also contributes to global imbalances. Economists like Michael Pettis and Matthew C. Klein argue that this reserve-driven capital flow distorts trade and investment patterns, particularly when motivated by self-insurance rather than export-led growth.
Recent research by Haillie Lee and Phillip Lipscy of Princeton and Stanford affirms this view, showing that reserve accumulation in East Asia post-1997 has been driven primarily by financial safety concerns, not mercantilist ambitions. Central bankers in the region, including those in crisis-experienced economies, remain skeptical of IMF intervention in future emergencies—citing punitive conditions or insufficient support—and do not expect swap lines from the Fed. In response, they’ve doubled down on stockpiling dollar assets.
How This Affects the Trade Deficit—and Global Flows
When nations pursue large-scale reserve accumulation, they often engineer trade surpluses to fund it—contributing to the U.S. capital account surplus, and by extension, the current account deficit. Without swap lines or IMF access, this cycle intensifies. While the mechanism may be indirect, the policy implications are clear: dismantling the safety net creates the very pressures the U.S. seeks to alleviate.
Martin Wolf has summarized the dilemma succinctly: resolving global trade tensions depends, in part, on the architecture of the international monetary system.
Yet the Trump administration is unlikely to support reforms that would reduce dollar centrality—such as strengthening the IMF, expanding Fed swap lines, or encouraging reserve diversification away from the greenback. These options form what some observers have labeled the “Trump trilemma”—a situation where the administration’s fiscal, trade, and monetary goals conflict with each other.
Swap Lines Alone Aren’t a Silver Bullet
It’s important for RIAs to note that central bank swap lines, while impactful, have their limits. As monetary economists Michael Bordo and Robert McCauley have noted, foreign official holdings of dollar assets—while significant—have only marginally funded the U.S. current account deficit in the post-2008 era. Much of the increase in foreign demand for Treasurys has come from private sector buyers, particularly asset managers and pension funds outside the U.S.
Swap lines, by design, serve official-sector entities—central banks and reserve managers. They don’t alleviate private-sector dollar demand or prevent sudden reallocations out of U.S. fixed income markets. That means even a robust swap line program doesn’t insulate Treasury yields or U.S. funding markets from broader global risk-off moves.
Moreover, signs suggest foreign official enthusiasm for dollar assets may be waning. Reports indicate that China’s State Administration of Foreign Exchange (SAFE), one of the world’s largest reserve holders, is planning to reduce its dollar exposure. That would extend a decade-long trend in which the dollar’s share of global foreign exchange reserves has declined.
What Advisors Should Watch
Despite these shifts, foreign official institutions still represent significant marginal buyers of U.S. debt. They held roughly 20% of long-term U.S. securities as of 2024. If the Fed were to scale back swap lines while the Treasury simultaneously pursues reduced foreign ownership of U.S. bonds, it could destabilize funding markets.
For advisors and institutional allocators, the implications are strategic:
Monitoring geopolitical risk in currency markets becomes critical, especially for portfolios exposed to dollar-denominated EM debt or foreign banks reliant on dollar liquidity.
Treasury market dynamics could become more sensitive to changes in foreign reserve management practices.
Contingency planning should incorporate scenarios where swap access becomes more restrictive or politicized, affecting funding conditions abroad and potentially feeding back into domestic credit markets.
If the U.S. were to move toward relinquishing its role as global issuer of safe assets and central provider of dollar liquidity, eliminating or limiting Fed swap lines would be a first and consequential step.
Conclusion: A Fragile Balance
The Fed’s swap line architecture remains one of the most effective tools for cushioning the global economy during dollar liquidity crunches. Undermining it—whether directly through policy or indirectly via political pressure—could accelerate the very imbalances the U.S. seeks to reduce.
For wealth advisors, this underscores the importance of staying ahead of policy shifts that reverberate through currency reserves, cross-border flows, and Treasury markets. The next chapter of U.S. global financial leadership may hinge as much on swap lines as it does on interest rates or inflation targets.
