The UAE wants in on the dollar club

As the war in Iran remains unresolved, the United Arab Emirates is looking to the U.S. for a currency exchange. The U.S. is considering it.

Currency swaps can happen in a couple of ways: One way is through the Federal Reserve, where dollars are created and generally used to support financial stability during times of market stress. Right now, that route is reserved for five countries, which currently don’t include the UAE.

The other way is through the U.S. Treasury’s stabilization fund, which is generally used to help stabilize the dollar if there is turmoil in another foreign currency market. That’s how Argentina was given a swap in 2025, but that pot has a limit on how much it can lend out.

To understand why the UAE might be looking for a swap and what that means for the U.S., “Marketplace Morning Report” host Sabir Ben-Achour spoke with Brad Setser, an economist and the current Whitney Shepardson Senior Fellow at the Council on Foreign Relations. The following is an edited transcript of their conversation.

Sabri Ben-Achour: So, a currency swap is [when] the U.S. gives a bunch of dollars to a country, — the UAE, in this case — and then that country gives us a bunch of their currency. Why would they want that?

Brad Setser: Well, with the UAE, it's actually a bit of a mystery, because the UAE has an enormous stockpile of assets. Abu Dhabi is generally thought to have $2 trillion in foreign assets across its sovereign wealth funds. Its central bank has close to $300 billion in reserves. Abu Dhabi and Dubai have been able to borrow in the government bond markets, in the dollar bond market. So while they are hit with a severe shock from the loss of oil revenue, possibly some capital flight out of Dubai, they appear to have the resources to handle it.

So, there's two theories for why they may have made the request. One theory is, well, it never hurts to have a little extra dollars’ cash on hand. If the U.S. is willing to provide it, why not take it? But the other theory, which is what the Emirates have been leaning into is that it's a bit of a signal — and a signal, I don't think the Emirates should get — that you've joined the big boys club. You're on the same plane as the ECB, the Bank of England, the Swiss National Bank, the Bank of Japan, the countries that have standing swap lines with the Fed.

Ben-Achour: You're saying the UAE doesn't really need those dollars, but just wants to be part of the club of countries that get to have them sometimes. Why do you think it should not?

Setser: The Federal Reserve swap line currently has been used basically to provide dollars to your banking system. And I think with respect to the UAE, the domestic banking system is a bit too intertwined with the royal family, with the Gulf sovereign wealth funds, with the Emirates sovereign wealth funds to be a good candidate to receive essentially unconditional dollar liquidity that is generally reserved for countries that have a longer history of arm's length regulation, and countries who — frankly — have bigger banking systems, where if those banking systems ran short of dollars, they would be selling U.S. assets and interfering with the conduct of monetary policy. There's a stronger case for a Treasury swap line, but the irony is that the Treasury's Exchange Stabilization Fund, if you stretch it to its maximum limit, has $212 billion available. The Emirates central bank has $285 billion.

Ben-Achour: So is this like a prestige thing?

Setser: The most logical explanation is yes, it's a prestige thing. This is a request the Emirates have made before. It's a request that is traditionally turned down pretty quickly because the Emirates doesn't need the money, because it doesn't clearly qualify. It doesn't have the standards of transparency, doesn't produce high-quality economic and financial data; it doesn't produce timely data. But it may think that in this moment of distress, it can squeak in.

Ben-Achour: Are the oil countries, by selling their oil in dollars and then recycling those dollars into the stock market or Treasuries, are they propping up the economy and the U.S. government by doing so?

Setser: Well, any country that's accumulating assets in dollars and lending to the U.S. is providing financing to the U.S. economy that supports the dollar. The Gulf countries actually haven't been the biggest source of dollar inflows recently. That has really been the bigger Asian manufacturing surplus countries — China, Korea, Taiwan. Before this shock, the Gulf countries collectively were maybe adding $100 billion to their foreign assets. Most of that was going into equities. Very little was actually going into the offshore dollar lending market — the classic euro, dollar, petrodollar nexus.

With this shock, the entire Gulf region, at least temporarily, is going to be a borrower. There's not enough of an oil flow getting out of the Gulf with the Strait closed. So, as opposed to being a source of petrodollars, the Gulf countries are now going to be borrowers in the offshore euro, dollar market. The Saudis already are; Abu Dhabi has been borrowing; Qatar has been borrowing; I'm sure Kuwait's going to be borrowing. You're going to see an awful lot of dollar borrowing from countries that are normally lenders just because they don't have any oil proceeds.

Ben-Achour: Does that affect us in any way? I mean, like one hears about significant investment from the Gulf in AI or other investments here in the U.S. So if that's not happening because they're busy borrowing to deal with their problems, does that have any negative impact on us?

Setser: Look, if our tech companies can't raise money here at home, given how excited they are about their technology, there's a problem. Yes, the Gulf countries have been a source of financing, have been willing investors, have been willing to build out data centers. But at the end of the day, our tech companies are some of the world's richest companies. If AI is anywhere near as exciting and as promising as these companies claim, I am not worried about their ability to find other sources of money.