The United Arab Emirates apparently dropped a hint the dollar\u2019s dominance isn\u2019t assured in the global oil trade if fallout from the Iran war gets worse.<\/p>\n
According to the Wall Street Journal<\/a>, the UAE\u2019s central bank chief raised the idea of a currency-swap line with Treasury Department and Federal Reserve officials during\u00a0meetings in Washington, D.C., last week.<\/p>\n 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. <\/p>\n But while the UAE isn\u2019t 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.<\/p>\n If the Iran war triggers a deeper economic downturn, a swap line with the U.S. would provide the UAE\u2019s 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.<\/p>\n UAE officials also pointed out the U.S. started the Iran war and said they may be forced to use China\u2019s yuan or other currencies for oil transactions if the availability of dollars gets tight, sources told the Journal.<\/p>\n The UAE\u2019s central bank didn\u2019t immediately respond to a request for comment.<\/p>\n Any pivot away from the dollar by a top oil producer would represent a major threat to the currency\u2019s supremacy. Saudi Arabia\u2019s decision in 1974 to price its exports in dollars helped establish the dollar as the standard across the global oil trade.<\/p>\n And because oil is a core input to manufacturing and transport, supply chains elsewhere dollarized, reinforcing the greenback\u2019s dominance in payments.<\/p>\n But the Iran war could worsen some cracks that had already been forming in the so-called petrodollar regime, analysts at Deutsche Bank warned<\/a> last month.<\/p>\n \u201cDamage to Gulf economies could encourage an unwind in their foreign asset savings,\u201d they said. \u201cIn 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.\u201d<\/p>\n Any loss of the dollar\u2019s \u201cexorbitant privilege\u201d would also ripple through other areas of global finance, including the bond market. Thanks to the dollar\u2019s status as the world\u2019s reserve currency, the federal government has long been able to issue debt at rates lower than investors would otherwise allow.<\/p>\n