The Iran conflict has severely impacted the Gulf economy, prompting the United Arab Emirates to seek guarantees for U.S. dollar liquidity while pressuring Washington by hinting at shifting to alternative currencies for settlements.
On April 19, according to The Wall Street Journal, the UAE has initiated preliminary discussions with Washington regarding U.S. financial support. Informed U.S. officials disclosed that UAE Central Bank Governor Khaled Mohamed Balama met with Treasury Secretary Scott Bessent and Federal Reserve officials last week in Washington, proposing the establishment of a currency swap line to prevent the war from dragging the oil-rich nation deeper into economic crisis.
The core context of these talks is that the Iran conflict has caused substantial damage to the UAE's oil and gas infrastructure and blocked its oil export route through the Strait of Hormuz, cutting off a critical source of dollar revenue. UAE officials warned that if foreign exchange reserves continue to deplete, the country might be forced to shift to other currencies for oil transactions—a statement perceived as an implicit threat to the U.S. dollar's dominance. However, the report noted that the UAE has not yet submitted a formal request, characterizing the proposal as a "preliminary and precautionary" measure.
Currently, the UAE dirham is pegged to the U.S. dollar, and its foreign exchange reserves stand at $270 billion. However, risks of capital flight, stock market volatility, and supply chain disruptions triggered by the war are exerting multiple pressures. Meanwhile, Abu Dhabi raised approximately $4 billion from investors through a private placement earlier this month, and Bahrain established a roughly $5 billion swap line with the UAE, indicating that Gulf states are pursuing multiple avenues to address liquidity pressures.
**War Impact: Disrupted Oil and Gas Revenue, Reserves Under Pressure**
Before the ceasefire agreement took effect on April 17, Iran launched over 2,800 drones and missiles at the UAE. Although most were intercepted, the conflict inflicted substantial damage on the UAE's oil and gas infrastructure and severed its ability to transport oil via the Strait of Hormuz, depriving the country of a vital source of dollar income.
In communications with U.S. counterparts, UAE officials emphasized that it was the Trump administration's decision to attack Iran that drew the UAE into this destructive conflict, and the repercussions may not be over. The war has also prompted the UAE to align more closely with the U.S. diplomatically, temporarily abandoning its previous strategy of seeking to avoid regional conflict by establishing diplomatic and financial ties with Iran.
In a previous report, credit rating agency S&P Global noted that the UAE's "strong fiscal, economic, external, and policy buffers" would provide effective cushioning but also warned that the "potential for a prolonged disruption" of oil exports and infrastructure damage "pose significant risks to expectations." The International Energy Agency characterized this supply shock as "the most severe oil supply shock in history."
**Swap Request: Fed Approval Uncertain, Treasury a Potential Alternative Path**
Currency swap lines, typically overseen by the Federal Reserve, could provide the UAE central bank with low-cost dollar funding to support its currency or replenish reserves. However, the report indicated, citing informed officials, that approval for such an arrangement by the Federal Open Market Committee (FOMC) is considered unlikely.
The Fed generally reserves swap lines for alleviating severe funding market pressures that could spill over into the U.S. economy. Its standing arrangements are limited to the central banks of the UK, Canada, Japan, Switzerland, and the European Union. During the 2020 COVID-19 crisis, the Fed extended swap lines to nine central banks, including those of Mexico, South Korea, and Brazil, but the UAE's connection to U.S. financial markets is significantly weaker than these traditional counterparties.
An alternative path through the U.S. Treasury might be more feasible. The report stated that last year, the Treasury provided a $20 billion swap arrangement for Argentina through the Exchange Stabilization Fund, which did not require approval from the Federal Reserve Board. Last week, U.S. Treasury officials also invited Gulf states to discuss infrastructure repair and economic reconstruction needs during the International Monetary Fund and World Bank annual meetings, pledging priority support if assistance is required.
Simultaneously, the UAE played a significant card in the negotiations. According to informed officials, UAE officials explicitly told their U.S. counterparts that if foreign exchange reserves run critically low, the country might be compelled to shift to other currencies for oil sales and other transactions.
Analysis suggests this statement touches a core sensitivity of the dollar system. The U.S. dollar's dominant role in the global monetary system is partly built on the near-exclusive use of the dollar for oil transactions. If Gulf oil producers shift to alternative currencies for settlements, it would pose a structural challenge to the dollar's reserve currency status.
**Multiple Avenues: Gulf States Accelerate Self-Financing Efforts**
While awaiting a U.S. response, the UAE and neighboring Gulf states have activated multiple financing channels.
According to informed sources, Abu Dhabi raised approximately $4 billion from investors earlier this month through a private placement arranged by banks including Goldman Sachs, paying a premium to expedite the financing process.
The central banks of Bahrain and the UAE also established a bilateral swap line worth about $5 billion this month to enhance mutual financial stability.
Nevertheless, attending Gulf finance ministers and central bank governors generally expressed caution regarding the economic recovery outlook. Saudi Finance Minister Mohammed Al-Jadaan stated during a panel discussion at the IMF and World Bank annual meetings:
"Simply rescheduling tanker routes and returning to normal operations might take until the end of June. Anyone expecting a rapid recovery—even if the conflict ends completely—needs to recalibrate their expectations."
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