The 50-year-old petrodollar system, which helped cement the US dollar’s global dominance, may be facing its biggest rupture yet as the Iran war disrupts both oil flows and foreign demand for US Treasuries. reported Bloomberg.
The piece traces the arrangement back to 1974, when then US Secretary of State Henry Kissinger struck a landmark deal with Saudi Arabia under which oil would be priced in dollars and surplus revenues invested in US assets, particularly Treasury bonds, in return for American security guarantees.
Over the past five decades, this “petrodollar loop” helped reinforce the dollar’s reserve currency status and supported US borrowing costs.
According to the op-ed, the current Iran war has fractured this mechanism from both sides. On the importing side, oil-consuming countries facing a surge in crude prices and weakening currencies are reportedly selling Treasuries to raise dollars and defend their exchange rates.
The author notes that foreign central bank holdings at the Federal Reserve Bank of New York have fallen by around $82 billion to $2.7 trillion, while the US 10-year Treasury yield rose from 3.9 percent to above 4.4 percent in recent weeks instead of falling as it typically does during crises.
On the exporting side, Gulf producers are unable to fully benefit from higher oil prices because the war and disruptions around the Strait of Hormuz have restricted exports.
Gulf states including Saudi Arabia, United Arab Emirates, Kuwait, and Iraq are said to have collectively cut production by at least 10 million barrels per day in March, while alternative export routes remain limited and vulnerable.
The piece also highlights that Gulf sovereign wealth funds and regional governments are now reviewing investment commitments to Washington, while structural trends had already been weakening foreign demand for US debt.
It notes that foreign holdings of Treasuries had already fallen to around 32 percent, down from nearly half in the early 2010s, and that global central banks now hold more gold than US government bonds for the first time since 1996.
Treasury market’s traditional safe-haven status has long depended on the political assumption that the United States acts as a stabilizer in global crises but with Washington now directly involved in the war, this assumption is being tested in a way not seen in decades.
