A significant signal of financial stress in the Gulf has emerged: according to the Wall Street Journal, the governor of the UAE's central bank has opened talks with the United States about a currency swap arrangement. The stability of the UAE's currency, the dirham, depends on its peg to the US dollar, which is maintained through large dollar reserves accumulated via the UAE's trade and financial networks. Those reserves are now under pressure from two directions: maritime trade disruption and capital flight – particularly in real estate, where luxury property discounts of over 50% are being reported. Together, these forces threaten a structural decline in dollar income. This is the mechanism that triggered the 1997 Asian financial crisis: when dollar reserves backing a pegged currency erode faster than they can be replenished, a currency crisis becomes self-fulfilling.
The Gulf states are therefore in urgent need of regional stability – but looking at both the US and Iran, that appears unlikely. The US is caught between three bad options: tacitly admitting defeat and watching the Iranian regime it tried to destroy consolidate into a regional power with global influence through its control of the Strait of Hormuz; muddling through while the global economy absorbs severe shocks across multiple supply chains; or risking the consequences of further military escalation. Meanwhile, according to reporting by The New Yorker, those who now govern Iran are considerably more hardline than is widely assumed – and less inclined than their predecessors to accept a diplomatic settlement favorable to the US and Israel.
All of this carries a long-term risk for the US in its rivalry with China. In their talks with Washington, UAE officials explicitly warned that the Chinese renminbi is a serious alternative to the US dollar. This warning is credible because the Gulf states have already been building the infrastructure for such a shift. The mBridge project – a digital currency platform backed by the central banks of China, Saudi Arabia and the UAE – processed $56 billion in transactions in 2025, a 2,500-fold increase from 2022. Although mBridge operates at the level of financial transactions rather than central bank reserve holdings, this is how the dollar's network effects would weaken first in a long-term shift.
As the Hormuz crisis continues, we would be wise to remember a lesson from the COVID crisis: local shortages of specific resources can cascade into larger global problems that are difficult to predict. Global attention is currently focused on energy (rising oil and gas prices), food (higher fertilizer costs) and helium (critical for computer chip production), but a closer look reveals at least three additional supply chain disruptions that could spiral into something larger.
First, shortages of naphtha — refined from oil and used in the production of plastics, chips and cars — have triggered an industrial state of emergency across Asia. Both Japan and South Korea are attempting to calm markets, but supply chains are already being disrupted. In Japan, the prime minister intervened to quell online rumors of an imminent shortage after several plastic producers announced production cuts affecting sectors as diverse as food and healthcare. South Korea has banned naphtha exports to protect domestic medical procedures and has reluctantly begun sourcing the material from Russia.
Second, Australia — heavily dependent on diesel — faces rising prices and emerging shortages that threaten to shut down both farming and mining operations. As an emergency measure, several tankers carrying diesel have been sent from the US, a journey that takes up to three months, underscoring the severity of the situation. This matters globally: Australia is one of the world's largest producers of minerals like iron ore, lithium and nickel.
Third, Europe is on course to run out of kerosene within three weeks. While an aviation disruption may appear less urgent than food or mining, it would indirectly affect a wide range of businesses and economies through the collapse of tourism.
Each of these shortages may seem secondary to the broader disruption of energy, food and chip production. But together they threaten industries as diverse as healthcare, mining and tourism — and could push the global economy into territory that is difficult to predict.
In every global crisis of our generation — the 2001 dot-com crash, the 2008 financial crisis, the 2020 COVID crisis — global investors sought safety in US Treasuries, placing capital in the 10-year US government bond. The 2026 war in Iran has broken that pattern. For the first time in a global crisis, China's government bonds are the only safe haven, holding their value while US Treasuries, other government bonds, and even gold have sold off. Meanwhile, equity markets in China have also lost less value than their counterparts in the US, Europe and Japan.
This is happening despite investors' well-documented reservations about Chinese assets — political risk, capital controls, and the difficulty of converting renminbi into dollars, euros, or yen. That is because, as we have written in the past year, China's safe haven status is part of a larger shift: trust in US stability is declining, while China is no longer seen as uninvestable, leads in technological innovation, sets global standards, has soft power and is better prepared for an era of prolonged global conflict.
