UAE Under Dollar Stress, Investigates a Currency Swap with the Fed or Treasury

Emirati officials speak with Treasury Secretary Scott Bessent about accessing dollars if Middle East conflict drags on.

Wartime Financial Lifeline

The Wall Street Journal reports U.A.E. Asks U.S. About a Wartime Financial Lifeline

The United Arab Emirates has opened talks with the U.S. about obtaining a financial backstop in case the Iran war plunges the oil-rich Persian Gulf state into a deeper crisis, U.S. officials said.

U.A.E. Central Bank Gov. Khaled Mohamed Balama raised the idea of a currency-swap line with Treasury Secretary Scott Bessent and Treasury and Federal Reserve officials in meetings in Washington last week, the officials said. The Emiratis emphasized that they had so far avoided the worst economic effects of the conflict but might still need a financial lifeline, the officials said.

The talks highlighted the U.A.E.’s concern that the war could inflict major damage on its economy and its position as a global financial hub, depleting its foreign reserves and scaring away investors who once saw it as a stable and secure place for their money. The conflict has damaged Emirati oil-and-gas infrastructure and shut off their ability to sell oil using tankers transiting the Strait of Hormuz, depriving it of a key source of dollar revenues.

In talks with the U.S. in recent days, they have portrayed the proposal as preliminary and precautionary, the U.S. officials said.

But they have also argued that it was President Trump’s decision to attack Iran that entangled their country in a destructive conflict whose effects may not be over, some of the officials said.

Emirati officials told the U.S. officials that if the U.A.E. runs short of dollars, it may be forced to use Chinese yuan or other countries’ currencies for oil sales and other transactions, some of the officials said.

In that scenario is an implicit threat to the U.S. dollar, which reigns supreme among global currencies partially because of its near-exclusive use in oil transactions. [ Mish: That WSJ sentence is financial nonsense of the month, circulating everywhere.]

I Smell a lie

The above Emirati statement makes little sense.

The UAE would be receiving dollars for oil. So why would the UAE be unable to sell oil for dollars?

• The UAE needs dollars because of massive damage done to its infrastructure by Iran.
• Also, its currency peg is under stress due to capital flight.

So, ignore what the UAE told the WSJ. Also ignore the WSJ’s petrodollar-related response.

The following paragraphs from the article tell the real story.

The Emirati dirham is pegged to the dollar and backed by foreign-currency reserves of $270 billion, but the war has put it under pressures from capital-flight risks, stock-market volatility and other disruptions, analysts said.

Abu Dhabi, the U.A.E.’s capital and the richest of the seven emirates that make up the country, raised around $4 billion from investors in private-placement transactions arranged by banks including Goldman Sachs earlier this month, people familiar with the matter said. The emirate borrowed at a premium to avoid a drawn-out fundraising process, they said.

The region needs for the damage to stop and a fast return to normal.

But how likely is that?

No Fast Recovery

Finance ministers and central bankers in Washington for the IMF and World Bank meetings said they didn’t expect an easy or swift recovery for the region.

“The basic logistics of scheduling tankers and bringing them back after the chaos we have seen, that will take possibly to the end of June,” said Mohammed Al-Jadaan, Saudi Arabia’s finance minister, during a panel on Thursday. “

Anyone who’s counting for a quick recovery, even if there is a total end of hostilities, will need to recalculate that.”

The Petrodollar Theory Is Dead. It Never Made Sense to Begin With

Regarding oil priced in yuan, please see The Petrodollar Theory Is Dead. It Never Made Sense to Begin With

Several readers asked me to discuss the petrodollar. Here are two pertinent theories.

The amusing thing is the UAE needs dollars, yet talks of having to sell oil for yuan.

It makes no sense. That’s the tell that things are much worse than the UAE is letting.

Note to UAE: Make up a better story than what you told the Journal.
Note to the WSJ: Read my article on petrodollar nonsense.