Efforts by Gulf states to diversify from oil and become international finance and tourism hubs are also at risk amid the Iranian bombardment.

“Damage to Gulf economies could encourage an unwind in their foreign asset savings,” Deutsche Bank said. “In this context, reports that the passage for ships through the Strait of Hormuz may be granted in exchange for oil payments in yuan should be closely followed. The conflict could be remembered as a key catalyst for erosion in petrodollar dominance, and the beginnings of the petroyuan.”

Any loss of the dollar’s “exorbitant privilege” would also ripple through other areas of global finance, including the bond market. Due the dollar’s status as the world’s reserve currency, the federal government has long been able to issue debt at rates lower than investors would otherwise allow.

To be sure, dollar doomsayers have consistently been proven wrong, and the greenback has surged against other top currencies during the Iran war.

But there’s an even bigger potential threat to the dollar’s dominance than China’s currency: a permanent shift away from globally traded oil and gas.

With energy prices sky high, countries in Asia that rely heavily on Mideast supplies are scrambling to ration oil and gas while turning to coal, nuclear power, and renewables.

Demand for electric vehicles is also up across the globe, with Deutsche Bank saying energy choices of the Global South, Europe and North Asia will be key to track.

“A move away from oil could be as powerful as the pressure to price it in other currencies,” it added. “A world that becomes more self-sufficient in defence and energy could also be a world that holds less USD reserves.”

This story was originally featured on Fortune.com

The core problem, Dalio said, is motivational asymmetry. For Iran’s leadership, the war is “existential,” a matter of regime survival, national pride, and religious commitment. For Americans, it’s about gas prices, and for U.S. politicians, it’s about the midterm elections. Dalio was clear over which side that calculus favors in a prolonged fight: “In war, one’s ability to withstand pain is even more important than one’s ability to inflict pain.”

Iran’s strategy, he says, is to inflict that pain for as long as possible, then wait for the U.S. to quit, just as it has done in Vietnam, Afghanistan, and Iraq.

Trump is now calling on allied nations to join a multinational escort operation through the strait, though for the most part, they haven’t yet been receptive. Dalio says it remains to be seen whether that effort can serve as a potential “solution” to getting the waterway reopened.

“If President Trump demonstrates his and the U.S.’s power to do what he said he would do, which is win this war by having free passage through the Strait of Hormuz and eliminating Iran as a threat to its neighbors and the world, it will greatly bolster confidence in his and the U.S.’s power.”

But if he doesn’t, the ripple effects, on everything from trade flows to capital markets and the dollar’s reserve currency status, could irreparably damage American hegemony. Tehran has also threatened the dominance of the petrodollar by reportedly agreeing to open the Strait of Hormuz to a limited number of oil tankers that trade in yuan rather than dollars.

“Both sides know that the final battle, which will make clear which side won and which side lost, still lies ahead,” Dalio wrote.

This story was originally featured on Fortune.com

Nowhere is the extent of the dollar’s entrenchment more evident than in the working of the little-known but gigantic market for foreign exchange swaps. In this market, global firms—multinational corporations, banks, insurance companies, securities dealers, and pension funds—shield themselves against currency fluctuations. According to the Bank for International Settlements (BIS), the amount of outstanding swaps currently stands above $100 trillion, with some 90% involving the dollar. (Far lower percentages involve the euro, Japanese yen, and other currencies.) This reflects the myriad ways in which the greenback is used for lending, borrowing, and investing.

So why are so many people obsessed with the petrodollar? It mostly comes down to a narrative that is only loosely grounded in facts. As the story goes, in the mid-1970s, the U.S. struck a bargain with Saudi Arabia, offering military aid and protection to the ruling House of Saud, in exchange for a Saudi promise to only accept dollars for oil and invest the proceeds in U.S. Treasuries. That set a precedent for other oil exporters to follow.

Those on the ground at the time remember things differently. One of the few foreigners allowed to live in the desert kingdom then was David Mulford, a young investment banker hired in 1975 by the Saudi Arabian Monetary Agency (SAMA), the nation’s central bank, as an adviser. In his 2014 memoir, he recalled how a team of six professionals struggled in SAMA’s dilapidated headquarters to manage “a portfolio growing at $5 and later $10 billion every thirty days,” relying on a single, sluggish telex machine for communicating with the outside world.

It turns out that oil was already predominantly priced in dollars and, as Mulford explained, Saudi Arabia had little choice but to plow its revenue into dollar-denominated assets. According to Mulford, who later became a U.S. Treasury undersecretary and ambassador to India, “In most markets outside the U.S. in those days a currency trade of just $10 million was enough to move markets, so there were practical limitations on the amount of currency diversification that we could achieve.” Furthermore, “purchases of German [bonds], or Japanese yen bonds, or Dutch guilder bonds, or Swiss franc notes were just not possible in the sizes common in the U.S. market.”

In other words, it was the American market’s unique depth, breadth, and liquidity—and not some secret deal—that led the Saudis to choose the dollar.

Petrodollars were a major reason why the greenback internationalized in the 1970s and the decades thereafter, as much of the income received by oil exporters was deposited in dollar accounts at banks around the world, primarily in Europe. But they are a much less significant factor in the global dollar market today.

While 44% of earnings from oil sales were deposited in offshore dollar bank accounts during the 1970s, that figure shrank to 27% by the early 2000s, noted Jess Hoversen, chief economist at Column, a San Francisco financial services firm, citing research from the IMF. The percentage is now in single digits, she estimates, as oil exporters’ earnings today are directed toward domestic development and sovereign wealth funds, which in turn are invested heavily in international stock markets and startups.

But the dollar market has surged even as the petrodollar took a step back. Hoversen pointed out that the offshore dollar credit market stood at $2.5 trillion in 2000, and hit $14.2 trillion by last year. “This tells us that the dollar is very structurally resilient,” she writes.

The debate about dollar dominance will continue to rage, as the Trump administration shakes investor confidence with actions like attacking the independence of the Federal Reserve. But barring much more serious self-inflicted wounds, the dollar will keep its place at the top of the currency league table for the foreseeable future—even if Iran demands oil payments in yuan.

The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.

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The administration has cycled through a list of increasingly desperate options, from building a naval coalition—with Trump saying he’d approached “about seven” countries—to a reported proposal to wind down the conflict without resolving the Hormuz closure. As of Monday, Trump told CNBC: “We are very intent on making a deal.”

The $39 Trillion Liability No One Is Talking About

While the gunboat diplomacy dominates the headlines, the more existential danger may be unfolding in the bond market. The U.S. national debt crossed $39 trillion on March 18, 2026, a milestone reached just weeks into the war in Iran. The speed of accumulation is staggering, and the timing could not be worse: interest costs on the debt are projected to become the fastest-growing line item in the federal budget over coming decades, and the U.S. has already suffered credit downgrades from all three major ratings agencies — S&P in 2011, Fitch in 2023, and Moody’s in May 2025.

The reason this matters geopolitically—not just fiscally—goes back to that 1974 handshake. The petrodollar system created a perpetual buyer for U.S. Treasury bonds in the form of oil-exporting nations. The mechanism was elegant in its simplicity: oil exporters accumulated vast dollar surpluses and parked them in U.S. Treasuries, which Washington was only too happy to supply. Saudi Arabia alone held $149.5 billion in U.S. Treasury securities as recently as December 2025 — a figure that, notably, rose by $12 billion over the course of last year, even as Riyadh declined to formally renew the original petrodollar agreement. That recycling loop is what allowed Washington to borrow cheaply, run persistent deficits, and still maintain the world’s reserve currency.

In 1965, French Finance Minister Valéry Giscard d’Estaing was widely credited with a memorable criticism of the Bretton Woods system that predated the petrodollar regime as an “exorbitant privilege” enjoyed by America, with the U.S. dollar serving as the world’s reserve currency. In the 1970s, once President Richard Nixon ended Bretton Woods by decoupling the dollar from gold, that privilege was revived in oil and debt, requiring every country on Earth to accumulate dollars simply to buy oil, and then reinvest those dollars back into American debt. Former Greek Finance Minister Yanis Varoufakis, a heterodox economist whose work sits outside mainstream consensus but who captures something real about the system’s coercive logic, calls this “the global minotaur,” likening the U.S. to the ancient king of Crete who held international trade captive to tribute that would feed the monster within his labyrinth.

The unfolding crisis in the Strait of Hormuz is exposing America’s privilege as a vulnerability. The speaker of Iran’s parliament delivered a warning this week that rattled bond traders: financial institutions backing the U.S. military budget were “legitimate targets,” and buyers of U.S. Treasury bonds were purchasing “an attack on your headquarters and assets.” It was theatrical. It was also a signal—that America’s $39 trillion debt load could become a pressure point in an escalating conflict.

The De-Dollarization Accelerant

Even before Iran closed the strait, cracks in the petrodollar system were visible—though economists caution that “cracks” is very different from “collapse.” The U.S. dollar’s share of global foreign exchange reserves has fallen to roughly 56.9% as of Q3 2025, its lowest level since 1995 and down from a peak of 72% in 2001, according to IMF COFER data. That is a real, multi-decade structural decline. But here is the critical detail most alarming headlines omit: the IMF itself found that roughly 92% of the quarterly decline recorded in mid-2025 was driven by exchange-rate movements—the dollar weakening made non-dollar holdings appear larger—not by central banks actively dumping dollars. (The weakening of the dollar is a whole other story, but Trump’s tariff regime, the exploding national debt and inflation expectations rising are all widely seen as major factors, along with the “Sell America” trade.) There is a meaningful difference between erosion and exodus.

The Chinese yuan, despite years of BRICS advocacy and aggressive promotion of yuan-denominated oil contracts, represents just 2.1% of global reserves. The euro holds second place at roughly 20%, but no single currency has emerged as a credible heir apparent. The Federal Reserve’s own 2025 assessment found that dollar reserve share has been “basically unchanged since 2022,” and that U.S. sanctions on Russia following the Ukraine invasion did not trigger the feared mass reallocation out of dollars.

Saudi Arabia, in fact, chose not to formally renew the petrodollar agreement in June 2024, but the informal, secretive nature of the deal makes it hard to evaluate whether this was a policy change. What the data actually show is that the Saudis still price the overwhelming majority of their oil in dollars; global oil markets remain structurally dollar-denominated; and the network effects that sustain that arrangement—every buyer, every trader, every swap desk globally priced in dollars—do not unwind overnight. As the Hinrich Foundation noted as recently as last week, “talk of de-dollarization is prone to hyperbole,” even as the IMF data confirms a slow, real erosion, because of the weakening dollar.

What the Hormuz crisis means isn’t an end to the petrodollar—it is a threat to accelerate a shift that was previously moving at a glacial pace by raising the geopolitical temperature around a system that had long operated below the radar. Every week the strait stays closed, Asian economies are forced to test alternative supply chains — existing bypass routes like Saudi Arabia’s East-West Pipeline and the UAE’s Abu Dhabi Crude Oil Pipeline to Fujairah absorb only a fraction of normal Hormuz volumes, meaning the pressure to find workarounds is real — and, at the margin, alternative payment mechanisms. If the crisis is resolved in weeks, those experiments are quickly abandoned. If it drags into months, habits begin to form. The dollar’s dominance is not a cliff—it is a long, slow slope—and the question the Hormuz standoff raises is not whether America falls off the edge today, but whether Trump’s handling of this crisis steepens the gradient.

There is a long slope down from this exorbitant privilege, as there remains no obvious successor to the dollar. And for all of Iran’s saber-rattling, its closure of the Strait of Hormuz is not a sophisticated financial weapon aimed at the dollar’s structural foundations. Rather, it is a desperate act of asymmetric warfare by a regime under unprecedented military pressure—a tactical move, not a strategic master plan.

Economic models analyzing the Hormuz closure project global GDP losses ranging from $330 billion in a short conflict to $2.2 trillion if it drags on. Those are serious numbers. But economic disruption is not the same as dollar displacement. If anything, crisis conditions historically drive a flight to dollars, not away from them, because the deep liquidity and institutional trust underpinning the dollar have no match.

Still, the U.S. should pay attention to its own abuses of that privilege. The consequences of sustained erosion are not abstract. The IMF has flagged that the U.S. is more fiscally imbalanced than its peers and that without reserve currency status, its credit position would be far worse. Foreign demand for U.S. Treasuries could weaken, forcing Washington to offer higher interest rates to attract buyers, which would feed directly into the cost of servicing the $39 trillion debt, creating a feedback loop of deficits and borrowing costs that could spiral well beyond the projections of today’s fiscal models. The Committee for a Responsible Federal Budget forecasts annual interest payments of $1 trillion and climbing. Add a prolonged oil shock and the ingredients for a genuine fiscal crisis in the medium term are present.

Trump has said he wants a deal. But his usual playbook, what Yale Management professor Jeffrey Sonnenfeld calls his “ten commandments,” a framework of transactional pressure tactics that served him well against conventional partners, is not working with an adversary like Iran with little left to lose. And time is the one thing the architecture of American financial dominance may no longer have in abundance. The petrodollar system was built in secret in 1974 and sustained quietly for 50 years. The Strait of Hormuz has now made its fragility visible to the entire world, whether or not Trump understood that ordering strikes on Iranian energy infrastructure and military targets would expose the financial architecture those bombs were implicitly defending.

For this story, Fortune journalists used generative AI as a research tool. An editor verified the accuracy of the information before publishing.

This story was originally featured on Fortune.com

According to economists, Gulf countries have been quietly diversifying their trade partners for years prior to the current conflict, trading oil outside the U.S. dollar and therefore definitionally destroying the principle of the petrodollar as the exclusive currency for trading oil. EBC Financial Group analyst Michael Harris wrote in a note on Monday that the dollar’s share of global foreign exchange reserves has reached a 25-year low, falling from 71% in 1999 to roughly 57% today.

Signs point to China being the big winner of a de-dollarization push. In 2024, Saudi Arabia did not formally renew its commitment to pricing oil exclusively with dollars. While the 1974 agreement was never a formal obligation and its secretive nature leaves question marks about whether it resulted in a policy change, Saudi Arabia has still made moves to diversify its trade partners. In 2023, the Kingdom and China signed a $7 billion currency swap agreement. The central bank of Saudi Arabia is similarly a key participant in the mBridge digital payment platform, which allows direct currency exchanges through the blockchain.

“This shift reflects a basic economic reality,” Harris wrote. “China displaced the United States as Saudi Arabia’s largest oil customer. The economic gravity pointed toward yuan while the currency arrangement pointed toward dollars.” The Saudis are largely still doing deals in dollars, even with China, but the door is now open.

Years of the petrodollar’s weakening grasp

The petrodollar’s weakness has been quietly exposed even in years prior to Saudi Arabia’s currency swap with China. The U.S. was among a handful of countries that imposed sanctions on Russia in the early 2010s following its annexation of Crimea. As a result, Russia began de-dollarizing its economy, agreeing with China to a currency swap worth 150 billion yuan, or about $25 billion. Though Iran has been selling oil to China for decades, their relationship strengthened after the U.S. reimposed sanctions in 2018 and 2019. China’s oil purchases now account for 90% of Iran’s exported oil.

“With the current war, there’s been renewed attention to the fact that Iran has, for years now, been selling much of its oil in the yuan because it doesn’t want to be tied to the United States or assisting it, and it’s trying to avoid U.S. sanctions,” David Wight, a historian at the University of North Carolina at Greensboro, told Fortune. “It’s trying to find purchasers, and that’s primarily China.”

Deutsche Bank economists warned the U.S. and Israeli attacks on Iran would continue to strengthen its ties to China, subsequently bolstering the yuan at the expense of the dollar.

“In this context, reports that the passage for ships through the Strait of Hormuz may be granted in exchange for oil payments in yuan should be closely followed,” the analysts said in a note to clients last month. “The conflict could be remembered as a key catalyst for erosion in petrodollar dominance, and the beginnings of the petroyuan.”

More broadly, Wight said, the revived spotlight on the petroyuan, as well as President Donald Trump’s persistent threats to redouble attacks on Iran, have signaled to other countries that there are instances in which the petrodollar may not be the most favored currency. While more than 90% of cross-border trade in the Americas is done through the petrodollar, according to a Deutsche Bank report, that share drops to about 70% of trade invoicing in the Asia-Pacific, and about 20% in Europe.

“That, in and of itself, is not going to cause the whole system to collapse,” Wight said. “But I think that the increasing aggressiveness of the United States in multiple fields—both in terms of sanctions and in terms of warfare—has caused more countries to kind of wonder, ‘Do we want to be completely tied or dependent on the dollar if things go sour for whatever reason?’”

How China is positioning itself to capitalize on petrodollar stumbles

China has positioned itself to capitalize on any cracks in confidence in the petrodollar, according to Fadhel Kaboub, an associate professor of economics at Denison University and president of the Global Institute for Sustainable Prosperity. China consumes about 15 million to 16.6 million barrels of oil per day, making up about 15% to 16% of the world’s total oil consumption.

In 2018, China launched the Shanghai International Energy Exchange, a subsidiary of the Shanghai Futures Exchange, that provided international investors a currency system outside the U.S. petrodollar.

From the perspective of Gulf countries, trading in the yuan “is not a geopolitical deal,” Kaboub told Fortune. “This is not a security deal. This is just logical commonsense business transactions. From a Chinese perspective, this is the building block to where China wants to be in 50 years.”

China is following the U.S. playbook when the petrodollar was first cemented by signaling to allied countries in the Gulf that it is able to provide a “security umbrella” and currency alternative in times of geopolitical stress, Kaboub said. But China has also invested heavily in renewable energy sources—including having nearly four times the amount of operational electricity from solar power compared with the U.S.—understanding that it needs to retain economic dominance in times when the world is no longer as reliant on oil. The timing is particularly crucial as the U.S. comparatively struggles to maintain and repair its outdated grid system, which has threatened how quickly it is able to scale its AI ambitions.

“They know that they will need to be an industrial and high-tech powerhouse that can impose its own currency and its own financial system on the rest of the world,” Kaboub said of China.

The fate of the petrodollar is at an inflection point during the Iran war. If Iran is able to maintain resilience against U.S. and Israeli forces, “that could be a major turning point,” Kaboub suggested. Iran is a relatively small nation, and by retaining control of the Strait of Hormuz, could signal to other countries there is a viable currency architecture outside the petrodollar. Conversely, if the U.S. gains control of the Strait of Hormuz, the petrodollar will likely retain its dominance. On Tuesday, Trump threatened to attack key Iranian power plants and infrastructure, as well as the death of “a whole civilization” unless Iran reopened the shipping channel.

To be sure, despite cracks in the petrodollar’s foundation, the currency is still far from becoming irrelevant.

“I’m not going to say that the petrodollar is dead, because that’s wrong,” Kaboub said. “It still overwhelmingly dominates international transactions. I’m not gonna say that there is a thing called the petroyuan that’s a rising superpower. It’s not there yet.

“It’s there as a potential alternative, but it‘s got a long way to go to position itself as a dominant alternative to the dollar,” he concluded.

This story was originally featured on Fortune.com

“The world saves in dollars in large part because it pays in dollars. The dollar’s dominance in cross-border trade is arguably built on the petrodollar,” says Sachdeva.

The dominance of the dollar in global trade drives strong foreign demand for US Treasuries, as American government bonds are known, making it relatively cheap for the US government to borrow money.

“The huge strategic importance of the Middle East to the dollar’s role as the world’s reserve currency should not be underestimated,” says Sachdeva.

‘Iran is fighting the global economy’

Trump’s war in the region is challenging the assumptions that underpin the dollar’s dominance. The world began trading oil in dollars because Gulf countries were assured the US would protect them. However, the US-Israeli strikes on Iran have provoked attacks on Middle Eastern nations not involved, from Saudi Arabia to Qatar.

“The current conflict has arguably shaken some core foundations of the petrodollar regime: the security-for-oil-pricing arrangement,” says Sachdeva.

US security guarantees have also done little to stop Iran from blockading the Strait of Hormuz, strangling the Gulf’s oil and gas exports.

“The current conflict may expose further fault lines by challenging the US security umbrella for Gulf infrastructure and the maritime security for global trade in oil,” says Sachdeva.

Navin Girishankar, president of economic security and technology at the Centre for Strategic & International Studies (CSIS), says: “Iran is fighting the global economy.”

This can be seen in Tehran’s vow to target energy infrastructure, desalination plants, data centres and financial hubs if the conflict escalates.

“If they are hit either through kinetic action or through cyber action, that begins to undermine the confidence that these countries have that the US can vouchsafe their security,” says Girishankar.

“The longer this continues, the more it will erode that credibility.”

A loss of confidence in American security guarantees could open the door for Gulf states to reduce their investments in dollar assets and trade oil in alternative currencies.

Ray Dalio, a billionaire investor, said on his Substack last week that everything hinged on whether Iran could maintain control of the Strait of Hormuz. If it does, the US will have lost the war and, with it, the credibility that underpins its economy.

Dalio warned: “When the world’s dominant power that has the world’s reserve currency is overextended financially, and it reveals its weakness by losing both military and financial control, watch out for allies and creditors losing confidence, the loss of its reserve currency status, the selling of its debt assets and the weakening of its currency – especially relative to gold.”

It All Comes Down to Who Controls the Strait of Hormuz: The "Final Battle" by Ray Dalio

I have found that most wars are filled with big disagreements about what is likely to happen and big surprises.

Read on Substack

Possible ‘compute dollar’ lifeline

Girishankar argues that the US may have a lifeline – what he calls the “compute dollar”.

“The risks around the petrodollar are big, but that’s not the game for the next 10 years,” says Girishankar. In the age of the artificial intelligence revolution, what may soon matter more is the currency in which computer chips and AI-enabled services are traded.

“If that is settled in US dollars, that is the successor to the petrodollar system,” he says.

But here, of course, the US also faces major competition from China.

For now, the petrodollar is protected by the Gulf states’ heavy investment in US dollar assets.

Middle Eastern countries have $2tn in central bank US dollar reserves, $6tn in sovereign wealth funds, and $1tn in public pension funds, according to Global SWF. Exiting or shrinking such positions cannot be done overnight.

The longer the war drags on, however, the more money Gulf states will need to repair their infrastructure and build up their own defences. Energy export revenues will also be reduced further.

As a result, Gulf countries may need to spend their dollar savings to support their economies.

The foundations of the petrodollar regime were already under strain before the war began, says Sachdeva.

Since America’s shale revolution made the US a self-sufficient energy power, the Middle East has pivoted to selling oil to Asia, which now purchases 85pc of the region’s crude. Saudi Arabia sells four times as much oil to China than the US, and China wants oil to be priced in yuan rather than dollars.

At the same time, Western sanctions on Russia and Iran have led both countries to increasingly shift their oil trade into other currencies.

Saudi Arabia has also been experimenting with non-dollar payment infrastructure, such as Project mBridge, a platform that facilitates instant cross-border payments across multiple central bank digital currencies.

In short, the infrastructure needed to sell oil in currencies other than the dollar has already been sketched out.

“In a worst-case scenario, one may see a fracturing of global oil pricing along trade routes and corridors,” says Sachdeva.

The oil transiting through Hormuz could be priced in yuan, for example, while the West continues to trade oil from the US in dollars.

Even if the world continues to trade oil in dollars, the war threatens the petrodollar’s dominance in another way.

“A bigger risk could come if the world begins to move away from globally traded oil and gas itself,” says Sachdeva.

The war has created strong incentives for countries to shift away from fossil fuels and towards more reliable energy sources. The Global South, Europe and North Asia in particular may opt for more resilient energy sources, such as renewables and nuclear power.

If the global oil trade declines and the dollar’s dominance fades with it, it will open the door for other goods to be sold in alternative currencies. That would threaten to drive up borrowing costs for the US, making it more costly for the world’s biggest economy to maintain its military dominance.

“The whole thing is not going to fall apart because of one thing, but it begins to erode something that’s built over 40 years,” says Girishankar.

“The question is, is this one of those tipping points?”

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Dalio's latest missive would align with his recent advice to investors: Buy gold and pan the U.S. dollar. That said, since the initial strikes on Iran, the price performance of the precious metal has been less impressive than the greenback's.

Though gold remains above $5,000 per troy ounce, it has fallen a little over 2% since the end of February, whereas the U.S. dollar index (DXY), which measures the dollar against six major foreign currencies, has risen about 2.7%.

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