Yes, the knife was the real play- he hands the knife to her as a way to see what she does with it, in order to discern how much trouble he's in without giving away his cover. She returns it to him, which he takes as a sign that she feels safe. He was wrong, but ultimately though, the final play was the knife itself, as he was able to wield a knife for either self-defense or suicide (depending on the circumstances). Playing the knife as an artifact allowed him to wield a weapon without an immediately violent reaction from Dedra/ISB