The US government is shipping millions of dollar bills from the Federal Reserve Bank of New York to replace the Iraqi dinar, making the greenback the de-facto currency of Iraq, at least in the short term, writes Conor O'Clery in New York
In a setback for the euro, the US is certain to readopt the dollar standard as the currency in Iraq's oil industry, three years after Baghdad turned to the euro as its international currency in protest against American-inspired sanctions.
The dollarisation move is likely to increase apprehensions in the Arab world about long-term US intentions in Iraq, though US Treasury officials say the final choice of a currency for post-Saddam Iraq would be left to a new government.
US officials running post-war Iraq in the short term will pay thousands of Iraqi civil servants in dollars in small denomination bills, according to the Wall Street Journal.
There are currently two types of dinars in circulation in Iraq, the so-called "Swiss dinar" in the Kurdish-controlled area of northern Iraq, and the "Saddam" dinar used in the rest of the country that bears a likeness of Saddam Hussein.
US officials do not expect a new Iraqi government to retain the dollar, which would be widely seen as an affront to its sense of nationhood, although a new national currency could be linked to the dollar.
After the overthrow of the Taliban, the new Afghan government led by President Hamid Karzai resisted pressure from the US to use dollars for larger-scale government transactions as a means of stabilising the economy.
Kabul opted instead for a simple new currency reflecting national independence, and the US State Department helped the Afghan government destroy old bills with mobile incinerators and shredders.
East Timor voluntarily adopted the dollar to replace the Indonesian currency after it achieved full independence from Jakarta, but Kosovo and Bosnia opted first for the deutschmark and then the euro.
The cash for dollar payments to Iraqi civil servants and oil workers will reportedly come from $1.7 billion in Iraqi assets abroad confiscated by US authorities.
British forces are reported to be already using dollars to pay maintenance and dock workers in Umm Qasr and Basra.
Dinars will continue to circulate in Iraq in the short term, but "Saddam" dinars have been devalued by widespread looting of banks.
The US plans to run Iraq's oil industry while it is being refurbished before handing it over to a new Iraqi government. The Pentagon is putting in place an advisory board of former oil industry officials, including Mr Philip Carroll, former chief executive of Shell Oil.
This makes it certain that the future sale of Iraqi oil will be in dollars, the international currency for oil transactions, once the UN lifts anti-Saddam sanctions that provide that only the UN can approve Iraqi oil sales.