Portuguese authorities revived their colonial claims in the late 1980s following the discovery of huge oil and gas deposits in the Timor Sea. The dollar decision will fuel tensions between the US, Portugal and other economic powers over the future of the strategically located territory. Portugal's overseas bank, Banco Nacional Ultramarino, even attempted to make the escudo the de facto currency of the UN occupation. It began trading in Dili last December, paying East Timorese public servants in escudos and refusing to issue US or Australian dollars. Portugal's loss is also a blow to its partners in the European Union, who backed the revival of its claims over the territory.
Japan is also unlikely to welcome the dollar's dominance.
It has become the largest aid supplier to East Timor and last month chaired an international donors' conference in Tokyo. The dollarisation of East Timor has a distinct class content. A stark example is the floating Hotel Olympia, sitting in Dili harbour for the use of UN personnel. Even before the UN decision, only US and Australian dollars, and escudos, were accepted as legal tender. One youth leader commented that the rich and the poor were using two different sets of currencies.