The United Arab Emirates apparently dropped a hint the dollar’s dominance isn’t assured in the global oil trade if fallout from the Iran war gets worse.
According to the Wall Street Journal, the UAE’s central bank chief raised the idea of a currency-swap line with Treasury Department and Federal Reserve officials during meetings in Washington, D.C., last week.
To be sure, the UAE has plenty of money, including $270 billion in foreign-exchange reserves and trillions of dollars across its sovereign wealth funds.
But while the UAE isn’t in a crisis, Iran has damaged its energy infrastructure and has blocked oil exports by closing off the Strait of Hormuz, weighing on dollar-denominated revenue.
If the Iran war triggers a deeper economic downturn, a swap line with the U.S. would provide the UAE’s central bank with a cheap supply of dollars that could back the dirham, which is pegged to the greenback, or beef up foreign-exchange reserves in the event liquidity runs low, the report said.
UAE officials also pointed out the U.S. started the Iran war and said they may be forced to use China’s yuan or other currencies for oil transactions if the availability of dollars gets tight, sources told the Journal.
The UAE’s central bank didn’t immediately respond to a request for comment.
Any pivot away from the dollar by a top oil producer would represent a major threat to the currency’s supremacy. Saudi Arabia’s decision in 1974 to price its exports in dollars helped establish the dollar as the standard across the global oil trade.
And because oil is a core input to manufacturing and transport, supply chains elsewhere dollarized, reinforcing the greenback’s dominance in payments.
But the Iran war could worsen some cracks that had already been forming in the so-called petrodollar regime, analysts at Deutsche Bank warned last month.
“Damage to Gulf economies could encourage an unwind in their foreign asset savings,” they said. “In this context, reports that the passage for ships through the Strait of Hormuz may be granted in exchange for oil payments in yuan should be closely followed. The conflict could be remembered as a key catalyst for erosion in petrodollar dominance, and the beginnings of the petroyuan.”
Any loss of the dollar’s “exorbitant privilege” would also ripple through other areas of global finance, including the bond market. Thanks to the dollar’s status as the world’s reserve currency, the federal government has long been able to issue debt at rates lower than investors would otherwise allow.
But Dan Alamariu, chief geopolitical strategist at Alpine Macro, isn’t buying predictions of a U.S. decline. In a note earlier this month, he acknowledged if Iran’s regime is left standing while retaining some control over the strait, it would represent a “strategic setback” for the U.S. and humiliation for President Donald Trump.
But the Gulf Cooperation Council, which includes the UAE and Saudi Arabia, has even more reason now to maintain close ties with the U.S., given China’s links with Iran, Alamariu added.
“The idea of a petroyuan or petroeuro replacement remains far-fetched,” he said.
Even if the petrodollar weakens, dollar dominance still rests on other factors that other currencies can’t match, according to Paul Blustein, a scholar with the Center for Strategic and International Studies.
Those include the depth, breadth, and liquidity of U.S. financial markets as well as the freedom to move money across U.S. borders virtually unimpeded, he wrote in a Fortune op-ed last month.
“It accounts for well over half of foreign currency reserves held by central banks, and a similar share of export invoices for cross-border trade, as well as international bank loans and bond issuance,” Blustein explained. “Network effects entrench its status; everybody has an incentive to use the dollar because so many others do.”
