The United Arab Emirates has signaled that the dollar’s dominance of the world oil trade may not be assured if the outcome of the Iran war goes badly.
According to The Wall Street JournalThe UAE’s central bank chief raised the idea of a currency-swap line with Treasury Department and Federal Reserve officials during meetings in Washington, DC last week.
To be sure, the UAE has plenty of money, including $270 billion in foreign exchange reserves and trillions of dollars in its sovereign wealth funds.
But while the UAE is not in crisis, Iran has damaged its energy infrastructure and cut off oil exports by closing the Strait of Hormuz, weighing on dollar-denominated revenues.
If the Iran war leads to a deep economic recession, the swap line with the US would provide the UAE’s central bank with a cheap supply of dollars that could back the dirham pegged to the greenback, or boost foreign exchange reserves when liquidity is low, the report said.
UAE officials also pointed to the US starting 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 is reduced. journal.
The UAE’s central bank did not immediately respond to a request for comment.
Any pivot away from the dollar by the top oil producer would represent a major threat to the currency’s supremacy. Saudi Arabia’s decision to price its exports in dollars in 1974 helped establish the dollar as the standard in world oil trade.
And because oil is a key input for production and transportation, the supply chain is dollarized elsewhere, reinforcing the greenback’s dominance of payments.
But the Iran war could worsen some of the cracks that have already formed in the so-called petrodollar regime, Deutsche Bank analysts warned last month.
“Loss in Gulf economies could encourage them to rest on their foreign asset savings,” they said. “In this context, reports that ships could pass through the Strait of Hormuz in exchange for oil payments in yuan should be closely followed. This conflict can be remembered as a major catalyst for the erosion of petrodollar dominance, and the beginning of the Petroyuan.”
Any loss of the dollar’s “excessive privilege” would also send ripples through other areas of global finance, including bond markets. Thanks to the dollar’s status as the world’s reserve currency, the federal government has been able to issue debt at lower rates than investors would otherwise allow.
But Dan Alamariu, chief geopolitical strategist at Alpine Macro, isn’t buying predictions of a U.S. downturn. In a note earlier this month, he acknowledged that it would represent a “strategic setback” for the U.S. and a humiliation for President Donald Trump if Iran’s regime continued to retain some control over the Straits.
