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11:08 17.09.2026 •
The petrodollar system underpinning U.S. financial dominance is breaking down as the Iran war disrupts both oil revenues and foreign demand for Treasurys, exposing limits to their safe-haven status, The Japan Times states.
The virtuous loop that has seen America underwrite stability in the Middle East in exchange for Gulf states recycling their dollar revenues into U.S. Treasuries has been broken.
The [petrodollar] understanding traces back to 1974, when Henry Kissinger struck one of the most consequential financial deals in modern history. Saudi Arabia would price its oil in dollars and park the surpluses in U.S. assets — Treasurys above all. Other Gulf states followed. In exchange, America provided security guarantees and a stable global order.
The arrangement was elegant in its circularity: Oil consumers paid dollars for energy, those dollars flowed to Riyadh and Abu Dhabi and from there back into Washington’s debt. For 50 years, this petrodollar loop quietly subsidized American borrowing costs and cemented the greenback’s role as the world’s reserve currency.
Those days that long floated the bloated US debt into something financeable, even if unsightly, are dying rapidly now thanks to the combined impacts of Trump’s War with Iran and Trump’s Tariff Wars. In fact, the dollar’s death has now been declared an accomplished fact — or, at least, something that has reached the point of being irreversible.
There just isn’t any love left for the dollar in this world nor much need for it, given so much less US trade requiring the use of Treasuries for dollar exchanges by central banks in both goods and oil. So, as reported in recent Daily Doom headlines, Central Banks have been turning toward gold, which can be used to cover major petrol transactions and all kinds of other transactions without shipping the gold just by earmarking who owns what gold that is stored in central banks and changing the designated owner as the transaction.
Enough people/nations in the world still wanted them to work. Those that didn’t like the dollar still had to play with the reality of the petrodollar having deeply involved itself in their own sovereign wealth, underwriting the US debt. But now, with the oil market busting to pieces, and the value of existing US bonds consistently falling throughout the war inversely to rising yields, there is less reason to hold on.
With animosity toward the US for bringing this entire oily mess upon the world in a war that is proving hopeless for Trump to win, which will leave the world under the slop of its wreckage, there is more desire than ever before to ditch the dollar… to find opportunities in the war to sell Treasuries into. And, so Bessent’s little flip is likely to fail, and those opportunities to sell are plentiful because, you see…
This time, Gulf producers can’t get their oil out. The Strait of Hormuz closure has stranded their barrels along with everyone else’s.
No oil flow equals no dollar flow… right in the heart of the region that was the original core of the petrodollar’s existence.
The petrodollar loop requires two moving parts: dollars earned and dollars invested. Both have stopped.
There is a longer structural story that the war is accelerating rather than creating. The share of Treasurys held by foreign investors had already fallen to around 32%, down from half in the early 2010s. Central banks became net sellers in early 2025. [When the Trump Tariff Wars hit.] For the first time since 1996, global central banks now hold more gold in aggregate than U.S. government bonds. These were slow-moving trends, easy to dismiss as noise. The Iran war is making them look like signal.
Kissinger’s 1974 deal held through the Cold War, the Gulf Wars, the financial crisis and a pandemic. It has not survived this. The petrodollar loop was always a political arrangement dressed in financial clothing. Now that the politics have changed, the finance is following.
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