Author: See the Subtle to Understand the Significant
Disclaimer: This report is compiled and analyzed based on the research paper "What the Iran Conflict Means for the Dollar: The Perfect Storm for Petrodollars" published by Deutsche Bank Research on March 24, 2026, and incorporates extended knowledge from Q&A discussions. It is provided solely for research purposes and does not constitute any investment advice.
Table of Contents
- I. The Underlying Logic of Dollar Hegemony
- II. Historical Origins and Operational Mechanism of Petrodollars
- Three: The correlation between crude oil and U.S. Treasuries
- Four: Three Sources of Pressure on the Petrodollar System
- Five: The Failure of Old Logic in the Current Conflict
- Six: Buffer Factors and Scenario Analysis
- Seven: The Long-Term Implications of Slow Variables
The long-term legacy of the conflict in Iran may lie in its impact on the foundations of the petrodollar system. Since 1974, the petrodollar cycle has underpinned the U.S. dollar’s status as the global reserve currency: the world buys oil in dollars → oil-producing nations recycle their surpluses into U.S. Treasuries → the dollar’s dominance in international trade is self-reinforcing. However, this system is now facing compounded pressures: pre-existing structural fissures, new shocks triggered by the war, and long-term threats from the energy transition. There is a dynamic transmission mechanism between crude oil prices and U.S. Treasury yields; understanding these mechanisms is critical to assessing how the current geopolitical conflict affects global asset prices.
Chapter One The Underlying Logic of Dollar Hegemony
1.1 From the Gold Standard to the Oil Standard
To understand the current crisis, one must begin with the historical evolution of dollar hegemony. The dollar’s international status has not remained static but has undergone two major institutional transitions.
Phase One (1945–1971): The Bretton Woods System. After World War II, the United States, leveraging its overwhelming economic and military power, established an international monetary system centered on the US dollar. Central banks of other countries could exchange dollars for gold at a fixed rate of $35 per ounce with the Federal Reserve, making the dollar effectively a “receipt for gold,” with its credibility grounded in the United States’ gold reserves.
Phase Two (1971–present): The Pure Fiat Dollar Era. In August 1971, President Nixon announced the decoupling of the dollar from gold (known as the "Nixon Shock"), leading to the collapse of the Bretton Woods system. The dollar thus entered the era of pure fiat currency, where its value is no longer backed by gold reserves but depends on U.S. sovereign credit and sustained global demand for dollar-denominated assets.
Key question: After gold was decoupled, what maintained the U.S. dollar's global dominance? — The petrodollar system.
1.2 Why "The World Saves in Dollars" Stems from "The World Pays in Dollars"
The reserve currency status of the U.S. dollar is essentially a byproduct of its trade currency status, not the other way around. Many believe the world uses the dollar because the U.S. is powerful, but the more accurate causal chain is:
- Global oil trades are priced and settled in U.S. dollars.
- Oil is a core cost input in all manufacturing (from petrochemicals, fertilizers, and transportation to factory operations).
- Businesses naturally tend to price their end products in U.S. dollars, creating a natural hedge against dollar-denominated costs.
- The global trading system thus became denominated in U.S. dollars, generating large U.S. dollar surpluses.
- These surpluses are primarily invested in U.S. Treasury securities, creating structural demand for dollar-denominated assets.
- Central banks accumulate U.S. dollar reserves to provide liquidity support when their domestic currencies come under pressure.
This is a self-reinforcing closed loop, with its core driver being the dollar pricing mechanism for oil.
1.3 Network Effects: Why Dollar Dominance Is So Hard to Disrupt
In economics, there is a concept called "network externality"—the more users a currency has, the higher the value each participant derives from using it. This is exactly the same logic as telephone networks or social platforms. The network effect of the US dollar manifests at three levels:
- Liquidity advantage: The U.S. dollar asset market is the deepest and most extensive globally, with the narrowest bid-ask spreads and the lowest market impact costs for large trades, making the opportunity cost of holding U.S. dollar assets the lowest among all currencies.
- Infrastructure advantage: The SWIFT international settlement system and the correspondent banking system both operate primarily around the US dollar, making the dollar the default pathway for global cross-border payments.
- Contractual convention advantage: Standard terms for commodity contracts and trade finance letters of credit default to pricing in U.S. dollars; changing this convention requires synchronized coordination among all global trade participants, resulting in extremely high transaction costs.
That’s why “de-dollarization” has progressed slowly despite being advocated for decades. Breaking this network requires either a large enough external shock or a competitor offering alternative infrastructure—and both conditions are gradually coming together in the current conflict.
Chapter Two: The Historical Origins and Operational Mechanism of Petrodollars
2.1 1974: An Underestimated Historical Transaction
The origins of the petrodollar system can be traced back to the 1974 U.S.-Saudi agreement, but the deeper implications of this deal extend far beyond its literal terms.
Historical context: After the collapse of the Bretton Woods system in 1971, the U.S. dollar lost its gold backing and faced a severe crisis of confidence. Meanwhile, the 1973 oil embargo by Arab nations caused oil prices to quadruple within a few months, prompting the United States to realize it needed to find a new way to anchor the dollar’s global standing.
The core of the deal: Saudi Arabia agreed to price its oil exports in U.S. dollars and invest its oil surpluses in U.S. Treasury bonds; in return, the United States provided security guarantees and military protection. Other Gulf Cooperation Council (GCC) nations subsequently followed suit, establishing a collective institutional arrangement.
Deep strategic implication: The United States uses its military power as collateral to back the credibility of the dollar. Essentially, after the collapse of the Bretton Woods system, the dollar shifted from a “gold standard” to a “petrodollar standard”—its value is no longer backed by gold reserves, but by geopolitical control over global energy trade.
Hidden subsidy mechanism: The structural demand from oil-producing countries to purchase U.S. Treasuries continuously suppresses the U.S. government’s financing costs. This means that every increase in global economic growth, driven by energy demand, indirectly subsidizes the U.S. Treasury market—the strongest and most concealed economic advantage of dollar hegemony.
2.2 The Self-Reinforcing Cycle of Petrodollars: Six Nodes
The petrodollar cycle is not a simple cause-and-effect chain, but a closed loop composed of six nodes, each reinforcing the others:
The key feature of this cycle is its self-reinforcing nature: the cost for any single participant to exit alone is extremely high, as it would require giving up the liquidity and convenience advantages provided by the entire network. This explains why the U.S. dollar’s dominance remains stubbornly intact, even as America’s international standing relatively declines.
Chapter 3: The Relationship Between Crude Oil and U.S. Treasuries
Understanding the relationship between oil prices and U.S. Treasury yields is one of the core analytical tasks of this report. This relationship is far more complex than simply "oil prices rise, Treasury yields rise" or "oil prices fall, Treasury yields fall"—in fact, rising oil prices simultaneously activate five distinct transmission mechanisms, and the net effect depends on the relative strength of these five mechanisms under specific conditions.
3.1 Mechanism One: Surplus Reinvestment Effect (Lowering Yield)
Transmission pathway:Rising oil prices → increased dollar income for oil-producing countries → accumulation of dollar surpluses → purchase of U.S. Treasury bonds → increased bond demand → downward pressure on yields.
This is the most direct manifestation of the petrodollar recycling cycle. Taking Saudi Arabia as an example, during the mid-2000s when oil prices rose from $30 to $147 per barrel, the dollar surpluses of GCC countries increased significantly, leading to a substantial rise in their purchases of U.S. Treasuries and creating sustained external demand.
Historical case: From 2004 to 2006, the Federal Reserve raised interest rates 17 consecutive times, increasing the federal funds rate from 1% to 5.25%, yet the 10-year U.S. Treasury yield remained virtually unchanged. Then-Fed Chair Alan Greenspan referred to this as the "Conundrum." One key academic explanation is the recycling of petrodollars—ongoing bond purchasing demand from oil-producing nations driven by rising oil prices continued to suppress long-term yields.
3.2 Mechanism Two: Inflation Expectation Effect (Boosting Yield)
Transmission pathway: Rising oil prices → increased energy costs transmitted to overall prices → elevated inflation expectations → market anticipates Fed rate hikes → short-term yields rise → subsequently driving up long-term yields.
Energy is a fundamental input in industrial production; rising oil prices transmit inflationary pressures to final consumer prices through direct channels (fuel costs) and indirect channels (transportation and raw material costs). As the ultimate gatekeeper of inflation, the Federal Reserve typically has no choice but to tighten monetary policy and raise market interest rates when faced with inflationary pressure.
This mechanism is the opposite of Mechanism One, creating a hedging relationship. Which one dominates depends on the nature of the oil price shock:
1) Demand-driven oil price increases (due to increased demand from global economic growth): Typically, the surplus recycling effect is stronger, with lower yields
2) Supply shock-driven oil price surge (geopolitical supply disruption): Typically has a stronger inflationary effect and greater upward pressure on yields
3.3 Mechanism Three: Dollar Index Effect (Direction Uncertain)
Transmission pathway: Rising oil prices → Increased global demand for the U.S. dollar (as oil must be purchased with dollars) → Stronger U.S. dollar → Higher translation costs for U.S. assets for foreign investors → Marginal suppression of foreign demand for U.S. bonds.
This mechanism is relatively subtle. Purchasing oil requires U.S. dollars, and rising oil prices mean increased global demand for dollars, boosting the U.S. dollar index. However, a stronger dollar is a double-edged sword for U.S. Treasuries:
For domestic investors: no exchange rate impact, demand remains unchanged
For foreign investors: A stronger U.S. dollar means higher costs to convert local currency into U.S. dollars, increasing the real cost of investing in U.S. Treasuries and reducing marginal willingness to buy.
Therefore, the net effect of this mechanism depends on the marginal influence of foreign investors in the U.S. Treasury market, is directionally uncertain, and typically acts as a dampening factor to other mechanisms.
3.4 Mechanism Four: Growth Expectation Effect (Lowering Yields)
Transmission pathway: Oil prices surge → Expectations of economic growth damage → Market shifts to safe-haven assets → U.S. Treasuries, as the world’s safest asset, attract capital inflows → Yields decline.
When oil prices surge sharply, raising concerns about economic recession, global capital flows into U.S. Treasuries seeking safety. This "safe-haven effect" can be extremely strong in extreme cases, even overpowering upward pressures from inflation expectations.
The historical lesson of 1979–1980: The Iranian Revolution triggered the second oil crisis, causing oil prices to surge while the global economy slipped into stagflation. To break inflation expectations, Federal Reserve Chair Volcker raised the federal funds rate to 20%. This is an extreme case where inflationary effects overwhelmed all other mechanisms, demonstrating that when supply shocks are severe enough, the Fed’s policy response becomes the decisive factor in yield movements.
3.5 Mechanism Five: Fiscal Deficit Effect (Pushing Up Yields)
Transmission pathway: Oil price shock → Energy-importing governments forced to increase energy subsidies and military spending → Budget deficits expand → Government bond supply increases → Under unchanged conditions, bond prices fall and yields rise.
This mechanism is particularly pronounced in the current conflict. The war not only drives up defense spending but also forces governments to subsidize energy costs for households and businesses to prevent social unrest, placing dual pressure on fiscal deficits. More importantly, as the U.S. debt burden continues to expand, the market requires higher yield premiums to absorb the increased supply, especially as foreign buyers decline.
3.6 Historical Comparison of Five Mechanisms
Chapter 4: Three Layers of Pressure on the Petrodollar System
4.1 First Layer: Structural Cracks Existing Before the Conflict
The process of undermining the petrodollar system began well before the outbreak of the Iran conflict. The following four structural changes are essential context for understanding the current crisis:
- Gap one: The United States is no longer the primary buyer of Middle Eastern oil.
The U.S. shale revolution (which began in 2008 and fully erupted in the 2010s) completely transformed the global oil trade landscape. The U.S. achieved energy self-sufficiency and significantly reduced its dependence on Middle Eastern oil. Today, Saudi Arabia exports more than four times as much oil to China as it does to the U.S., and 85% of Middle Eastern crude flows to Asia.
There is a profound geopolitical contradiction here: the United States uses taxpayers' money to provide security, but the primary beneficiaries of oil flows are no longer the United States. This contradiction is becoming increasingly difficult to explain to American voters on the domestic political level, exerting long-term structural pressure on the U.S.-Saudi alliance.
- Gap two: Saudi Arabia advances defense self-reliance
Under the Vision 2030 framework, Saudi Arabia has set a goal to increase the local procurement ratio of military expenditures to 50%, actively promoting the localization of its defense industry. This is not merely an industrial policy, but also a geopolitical signal: when a country no longer relies entirely on allies for weapons supply, its flexibility in adjusting its political stance increases significantly.
- Gap three: Project mBridge — Infrastructure bypassing the dollar system
Project mBridge is a cross-border payment system jointly developed by the People's Bank of China, the Hong Kong Monetary Authority, the central banks of Thailand, the United Arab Emirates, and Saudi Arabia, utilizing blockchain technology and settling transactions with central bank digital currencies (CBDCs), bypassing the SWIFT and U.S. dollar correspondent banking system.
The current U.S. dollar payment system operates on the principle that cross-border funds typically need to pass through U.S. correspondent banks and traverse U.S. ledgers, enabling the United States to monitor and sanction global fund flows. The strategic significance of mBridge lies in its creation of an international settlement infrastructure that operates entirely outside the U.S. sphere of visibility. The report specifically notes that this system has reached the "Minimum Viable Stage"—meaning it is technically ready for practical use and is no longer merely conceptual.
The infrastructure to circumvent sanctions has already been put in place, making it one of the most significant structural changes in this crisis.
- Gap four: Sanctions spur the creation of alternative systems
U.S. sanctions on Russia and Iran have objectively served as a "laboratory for de-dollarization." Sanctioned countries have been forced to develop alternative payment solutions, leading to the establishment of extensive trade practices settled in local currencies between Russia and Iran, Russia and China, and Russia and India. These experiences and infrastructures will persist and spread, becoming available to more participants. The "weaponization" of sanctions carries significant backfire effects—the more frequently sanctions are imposed, the stronger the global awareness of vulnerability to dollar dependence, and the greater the motivation for de-dollarization.
4.2 Layer Two: Three Direct Impacts of the Iran Conflict
Impact One: U.S. Security Assurance Reputation Damaged
U.S. military bases in the Gulf region have been attacked, and oil and gas infrastructure has been targeted; the symbolic significance of these events far exceeds their actual material losses. The core premise of the 1974 agreement—that the United States could provide effective security guarantees—is now openly and repeatedly questioned. For GCC countries, this triggers a rational calculation: if security guarantees are no longer reliable, is it still worthwhile to continue paying the implicit cost of dollar-denominated pricing?
Impact Two: Political Restructuring of the Strait of Hormuz Transit Rights
Some tankers passing through the Strait of Hormuz have been granted passage through bilateral diplomacy rather than U.S. naval power—vessels headed to China, India, and Japan received clearance. This means control over this globally critical energy corridor is shifting from “U.S. military power” to “Iran’s political will.”
Approximately 20 million barrels of oil pass through the Strait of Hormuz daily, accounting for 20% of global seaborne oil trade. This is not an abstract geopolitical issue, but a practical one that directly affects whether factories in Japan, South Korea, and Europe can operate.
Impact Three: Mandatory Promotion of Oil-Backed Renminbi
The most explosive reports come from multiple media outlets: Iran is negotiating with several countries to allow payment for oil in renminbi in exchange for transit rights through the Strait of Hormuz. If implemented, this arrangement would make transit rights themselves a bargaining chip for the pricing currency of oil—creating a new tool that directly links geopolitical control with monetary policy, effectively a forced induction version of "Petroleum Renminbi."
Once this mechanism is proven viable, its示范效应 will be far-reaching. The oil trade route from the Middle East to Asia may gradually develop into an independent RMB-pricing zone, parallel to the dollar-pricing zone in the Western Hemisphere—this is the core of the report's "worst-case scenario."
4.3 Third Layer: Energy Transition — A More Fundamental Threat to the Dollar
A deeper risk than oil-for-currency exchange is the decline in the total volume of global oil trade. Here’s a key distinction: what matters is not how much oil the world consumes, but how much oil the world trades across borders.
If Europe reduces oil imports through nuclear and renewable energy, the export surplus of the Middle East will shrink, leading to less trade settled in U.S. dollars and a decline in global demand for the dollar—even if oil prices remain high, the petrodollar system will weaken.
Three transition pathways for energy-dependent economies:
Critical warning: The petrodollar system is facing pressure on both legs—oil is under pressure to move away from dollar pricing, while the dollar is facing reduced demand due to declining oil trade volumes.
Chapter Five: The Failure of Old Logic in the Current Conflict
5.1 Surplus Reversal: From Largest Buyer to Potential Seller
Historically, oil price shocks have typically been accompanied by an expansion of dollar surpluses in GCC countries, leading to increased demand for U.S. Treasuries. However, the current conflict has disrupted this pattern: the war has simultaneously damaged the oil and gas infrastructure and production capacity of oil-producing nations, potentially turning Gulf economies from surplus entities into deficit entities that must draw on reserves to repair their economies.
Scale reference: The MENA region holds approximately $2 trillion in central bank-managed reserves and about $6 trillion in sovereign wealth funds, primarily allocated to U.S. Treasuries. If large-scale redemptions are used for domestic reconstruction, this would reverse the historical pattern of petrodollar recycling—turning the region into a net seller of U.S. Treasuries.
5.2 Structural Pressures on the Supply Side of U.S. Treasuries
To understand the current U.S. Treasury market, it is essential to consider the reduction in demand alongside the expansion in supply:
- Demand side: GCC reserves may shift from net buying to net selling; China’s holdings of U.S. Treasuries have declined from a peak of approximately $1.3 trillion to around $770 billion; Japan continues to sell U.S. Treasuries to intervene in the forex market amid yen depreciation pressures.
- Supply side: The U.S. fiscal deficit continues to expand, with wartime military spending further increasing expenditures; U.S. debt outstanding has exceeded $35 trillion, with annual net issuance reaching a record high.
This means the U.S. Treasury market is undergoing a historic structural shift: from “foreign central banks as stable marginal buyers” to “foreign central banks becoming net sellers,” requiring domestic buyers (the Federal Reserve, pension funds, commercial banks) to fill the gap, leading to a higher required yield premium.
5.3 Why the U.S. Dollar Failed to Strengthen This Time
Historically, geopolitical crises have typically been accompanied by a stronger dollar (safe-haven effect). However, during this conflict, the dollar’s performance has been much weaker than expected due to offsetting factors:
Positive: U.S. energy self-sufficiency provides a certain safe-haven premium, making it the only major economy in the world that is both energy-independent and far from conflict zones.
Negative (1): Rising risk of fiscal expansion, with sharp increases in defense spending exacerbating concerns over the U.S. budget deficit.
Negative (2): Asian and Middle Eastern countries sell U.S. Treasuries to defend their currencies (reverse petrodollar recycling)
Negative (3): The petrodollar cycle is weakening; the automatic mechanism that historically supported the dollar is failing.
This combination of “internal and external challenges” explains why the dollar has performed far weaker in this conflict than historical patterns would suggest.
Chapter 6: Buffer Factors and Scenario Analysis
6.1 The Counterforce That Cannot Be Ignored
For theseimportant buffering factors, understandingafterhelps form a more complete judgment:
The United States could become the largest oil supplier.
Thanks to the shale revolution, the United States has achieved energy independence; if it further integrates resources from the Western Hemisphere (Canada, Central and South America), its reserves will surpass those of OPEC. As the largest supplier, the United States will have the capacity to dictate the pricing terms of oil trade—shifting from “protecting buyers” to “controlling supply”—and maintain the dollar-denominated pricing system under the new framework.
GCC countries are deeply tied to the US dollar
The currencies of Gulf countries are pegged to the U.S. dollar, backed by trillions of dollars in foreign exchange reserves and sovereign wealth funds. The value of these reserves is directly tied to the dollar exchange rate, and any de-dollarization effort would trigger speculative attacks on their own currencies, creating a powerful self-reinforcing mechanism.
6.2 Scenario Analysis: Three Possible Futures
Chapter 7: Conclusion: The Long-Term Implications of Slow Variables
7.1 Distinction Between Short-Term and Long-Term
In the short term (1–3 years), U.S. energy independence provides some relative advantage, but multiple adverse factors offset each other, leaving the dollar potentially elevated but unlikely to strengthen significantly, while U.S. Treasury yields face upward pressure due to fiscal deficits and inflationary pressures.
More importantly, consider long-term structural changes (3–10+ years). The report identifies three long-term pathways that suppress the U.S. dollar: diversification of oil pricing currencies, declining global oil trade volumes (due to energy transition), and countries deliberately reducing dollar reserves for strategic autonomy. These are slow-moving factors that won’t materialize sharply in the short term, but once trends take hold, they will be difficult to reverse.
7.2 The Most Valuable Signals to Track
The following indicators are the most important windows for observing the trajectory of the petrodollar system:
Strait of Hormuz transit arrangement: Is a fixed RMB payment for transit rights mechanism being established?
GCC sovereign wealth fund trends: Is there a systemic decline in U.S. Treasury holdings in the MENA region?
The scale of mBridge usage: Are actual transaction volumes beginning to scale?
Saudi oil settlement currency: Are there any confirmed non-U.S. dollar oil contracts?
Nuclear energy investment in Europe, Japan, and South Korea: Does it constitute a substantive plan to move away from fossil fuels?
7.3 The Final Core Judgment
The core conclusion at the end of the report is worth reflecting on deeply: 【A world committed to national defense and energy self-sufficiency will also be a world holding fewer dollar reserves.】 This is not a prophecy of the dollar’s collapse, but a structural assessment of its gradual decline. As countries shift their optimal strategy from “integrating into the dollar system” to “reducing vulnerability to the dollar,” every node in the petrodollar cycle will weaken marginally. This is a slow-moving variable measured in decades, but its direction has become clearer because of this conflict.
