Trump turned the dollar into a foreign policy tool, and now risks undermining the currency’s extraordinary status, think tank says

For decades, the U.S. largely held off on approving currency swaps with foreign powers, save for rare circumstances. When it did, the Federal Reserve would trade currencies to shore up international dollar reserves, including at the height of the 2008 financial crisis. The central bank would also sign off on swap lines to restore confidence in dollar markets and prevent fire sales of U.S. assets, as is what happened in the early days of the COVID-19 pandemic. But for a foreign government to qualify for a swap line during President Donald Trump’s second term in office, however, the requirements seem to be much more simple. Sometimes, all it takes is being friendly to the president. Since Trump’s return to office, currency swap lines have morphed from a tool mostly used in crisis situations to a foreign policy instrument, potentially helping favored nations gain faster access to dollar liquidity. The quick evolution of currency swaps’ role has raised fears that they too might fall victim to politicization, according to an analysis published Monday by researchers at the Peterson Institute for International Economics, an independent nonpartisan research organization. The risk is particularly acute for lines originating from the Federal Reserve, where maintaining independence has been a red button issue as of late. But the Fed’s credibility is not all that’s at stake, according to the researchers. If foreign governments become convinced promises of dollar liquidity now come with geopolitical strings attached, they might choose to seek more predictable alternatives. By waving its favored currency as a geopolitical incentive for foreign partners, the Trump administration risks squeezing global demand for dollars, and eroding the framework of dollar dominance that has existed throughout the post-war era. “The president’s nonstop tariff threats display sticks aplenty, but Trump has offered carrots too,” the Peterson economists wrote. “If the supply of nonpoliticized [lender