UAE moots currency swap with US if Iran impact worsens

• Informal approach to US reported
• Central bank could mitigate shortages
• Net foreign reserves of $295bn

The UAE has informally asked the United States for a currency swap agreement that would enable the Gulf country to exchange dirhams for dollars should the Iran war cause longer-term economic challenges.

Khaled Mohamed Balama, the governor of the UAE central bank, which did not respond to AGBI requests for comment, has raised the possibility, The Wall Street Journal reported on Monday, citing US officials who spoke on condition of anonymity.

This was not a formal request for such an arrangement and is more of a preliminary suggestion, the Journal wrote.

A currency swap line is an agreement between two central banks to exchange currencies. Were the UAE to secure such a facility with the United States, the UAE central bank could exchange dirhams for dollars with the Federal Reserve and supply these to the domestic financial system to mitigate potential dollar shortages.

The two parties would swap back the funds at a pre-agreed date, with the UAE also paying interest.

Establishing a swap line would not necessarily indicate the UAE is running out of dollars but is more of a precautionary measure. The Fed maintains permanent swap lines with the central banks of the eurozone, Britain, Japan, Canada and Switzerland.

“This would be a strange move because the UAE has a very strong balance sheet and large foreign currency savings so the country could ride out this conflict quite easily from a currency perspective so long as the war doesn’t drag on for years,” said Jason Tuvey, deputy chief emerging markets economist at London’s Capital Economics.

“It may be just a confidence thing to provide reassurance about the UAE’s FX position, but if that was the aim it has done the opposite – before this news came out there wasn’t any talk about a dollar shortage in the UAE. Now there is.”

UAE central bank net foreign reserves rose to AED1.08 trillion ($295 billion) in February, more than double those held at the end of 2021.

Yet the central bank has reduced cash deposits held at banks abroad to AED270 billion in February, from a peak of AED584 billion in June 2024. During the same period, its holdings of foreign investments – which would typically include US treasuries, sovereign bonds and investment grade corporate debt – surged to AED763 billion from AED180 billion.

The dirham has been pegged at 3.67 to the dollar since 1997.

“It might be that the UAE would prefer a swap line to selling some of its foreign currency assets to support the dirham’s dollar peg,” said Tuvey.

The dollar peg compels the central bank to provide dollars on demand, but does not necessitate full one-to-one reserve backing, making the availability of liquid foreign currency more important than the headline size of reserves.

Nearly 9 percent – or AED248 billion ($67.5 billion) – of UAE banks’ total deposits are held by non-residents, according to AGBI calculations based on central bank data.

“That’s not major, but it’s not insignificant either,” said Tuvey. “Unless there has been vastly more capital flight than would seem likely and exports have been hit much harder than we anticipate I can’t see how – given the size of the UAE’s FX assets – it would get to a position in which it is in desperate need of a swap line.”

The US-Israeli war on Iran, which began on February 28 and spiralled into a wider Middle East conflict before a tentative ceasefire on April 8, has disrupted important UAE economic sectors such as energy, tourism and hospitality, also effectively closing public bond markets to new issuance.

UAE oil exports totalled $155 billion in 2025, according to Capital Economics’ estimates. Based on the decline in the country’s crude production but also the rise in oil prices due to the Iran war, UAE oil exports will fall to $125 billion this year, a drop of about $2 billion per month on an annualised basis.

“That’s small beer for the UAE,” said Tuvey.

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Tourism and travel, which are classified as exports, generated about $140 billion in 2025.

“A big chunk of that will have gone this year, while there’s also undoubtedly been some capital flight although that’s harder to quantify,” said Tuvey.

Since the conflict started, Abu Dhabi has issued $2 billion in bonds in a private placement, also selling a further $2.5 billion via a “tap” in which the issuer expands the size of already-issued debt, AGBI reported last week.