The United Arab Emirates initiates currency swap negotiations to ensure the safety net for the US dollar.

The United Arab Emirates has begun talks with the United States on a currency swap agreement, in preparation for preventing the U.S.-Iran armed conflict from becoming prolonged. This move is interpreted as an effort to ensure, in advance, emergency means to maintain stable access to U.S. dollars, given the assessment that war could disrupt the real economy and spread to the foreign exchange and financial markets.

Citing unnamed U.S. officials, The Wall Street Journal reported on the 19th that Khaled Mohamed Balama, governor of the UAE Central Bank, last week proposed to relevant personnel from the U.S. Treasury and the Federal Reserve the idea of concluding a currency swap agreement during the annual meetings of the International Monetary Fund and the World Bank held in Washington. It is understood that the parties contacted also included U.S. Treasury Secretary Scott Bessent. However, the report also said that, at this stage, the UAE has not yet formally made a request to sign such an agreement.

A currency swap agreement is a contract under which, in emergency situations such as foreign exchange crises or financial turmoil, one’s own currency is entrusted to the other country, and the contract is used to apply the other country’s currency or U.S. dollars. In particular, currency swaps with core dollar-issuing countries such as the United States are seen as one of the most powerful safety valves in the international financial market. This is because, the higher the share of U.S. dollars in oil settlement, international trade, and repayment of external debt in a given country, the more likely a lack of dollar liquidity during a crisis will trigger overall economic turmoil.

The background for the UAE to raise this discussion is concern that the war is directly hitting the core of its economic structure. According to reports, after the United States attacked Iran, the UAE’s energy infrastructure was damaged by Iranian drone and missile strikes, and oil exports through the Strait of Hormuz were disrupted, weakening the foundation of its dollar revenue. It is understood that the UAE has explained to U.S. officials that while it has avoided the most severe impacts so far, if the situation worsens further, it may need urgent financial support. Another report says that the UAE has also conveyed to the U.S. that if a shortage of dollars arises, it will have to consider using other currencies such as the Chinese renminbi in oil transactions.

The precedent of the United States using currency swaps to quell global financial turmoil during past crises is also seen as one of the backgrounds to this discussion. During the 2008 global financial crisis, the Federal Reserve signed currency swap agreements with 14 countries, including South Korea. When the COVID-19 pandemic hit and spread in March 2020, it again concluded currency swap agreements with more than ten countries, including South Korea. Market assessments believe that this move shows that the geopolitical conflict in the Middle East has now gone beyond security concerns and may shake the international monetary order and the energy settlement system. This trend also suggests that, depending on how widely the future war spreads and the strength of the U.S. response, discussions about the U.S. dollar safety net could extend to other oil-producing countries or emerging economies.