The United Arab Emirates seems to hint that the dollar’s stronghold on global oil trading might not be secure, especially if the situation surrounding the Iran conflict deteriorates further.
As reported, the head of the UAE’s central bank broached the subject of a currency swap line with U.S. Treasury and Federal Reserve officials during a recent meeting in Washington, D.C.
The UAE isn’t facing an immediate crisis—it boasts $270 billion in foreign exchange reserves and significant amounts parked in sovereign wealth funds. However, Iran has impacted energy infrastructure and impeded oil exports by blocking the Strait of Hormuz, which is influencing dollar-based revenues.
The report suggests that if a war with Iran leads to a broader economic downturn, a swap line with the U.S. could allow the UAE’s central bank access to affordable dollars to support the dirham, which is pegged to the dollar, or to strengthen foreign exchange reserves during potential liquidity issues.
UAE officials have also noted that if the U.S. escalates its involvement in the conflict with Iran, tighter access to dollars might push them to consider using the Chinese yuan or other currencies for oil transactions.
The UAE Central Bank hasn’t commented on these developments.
If major oil exporters begin to move away from using the dollar, it could pose a significant challenge to its dominance. The decision by Saudi Arabia to price its exports in dollars back in 1974 was crucial in establishing the dollar as the primary currency for global oil trading.
Furthermore, because oil is integral to various sectors, many supply chains have also come to rely heavily on the dollar, reinforcing its role in international payments.
However, experts from Deutsche Bank warned last month that a conflict with Iran could deepen existing vulnerabilities in the petrodollar system.
“Damage to Gulf economies might lead to a withdrawal of overseas asset savings,” they indicated. “In this context, developments allowing vessels through the Strait of Hormuz in exchange for oil payments in renminbi are worth monitoring closely. This might be recognized later as a crucial moment for the petrodollar’s decline and the rise of the petro-yuan.”
Should the dollar lose its “exorbitant privileges,” it would have wide-ranging consequences for global finance, particularly in bond markets. The dollar’s status as the world’s reserve currency has enabled the U.S. government to issue bonds at lower interest rates than investors would usually accept.
On the contrary, Dan Alamariu, the chief geopolitical strategist at Alpine Macro, expressed skepticism about predictions of a decline for the U.S. In a recent memo, he acknowledged that if the Iranian government continues to exert control over the Strait, it would represent a “strategic setback” for the U.S. and a troubling situation for President Trump.
Nevertheless, Alamariu pointed out that the Gulf Cooperation Council, which includes both the UAE and Saudi Arabia, still has strong motivations to maintain a close relationship with the U.S. considering their connections with China and Iran.
“The notion of supplanting the oil yuan or oil euro is still quite far-fetched,” he remarked.
Paul Bluestein, an academic at the Center for Strategic and International Studies, emphasized that even if the petrodollar experiences decline, the dollar’s supremacy hinges on factors that other currencies cannot easily replicate.
He highlighted the depth, breadth, and liquidity of U.S. financial markets, as well as the relative ease of transferring funds across U.S. borders. These factors contribute to the dollar’s standing. He noted in his recent commentary that more than half of foreign exchange reserves held by central banks and a similar proportion of trade-related payments are associated with the dollar. “Everyone has a reason to use dollars since so many others do,” he added.
