Dubai: The global financial system’s reliance on the US dollar for oil trade is being tested in real time as the Iran war approaches the two-month mark, with a fragile two-week ceasefire window now in focus.
What began as a geopolitical shock has evolved into a deeper market shift, forcing investors and policymakers to reassess the durability of the petrodollar system that has underpinned global trade for five decades.
At its core, the petrodollar framework is straightforward: crude oil is priced in dollars, energy-importing nations must hold dollars to buy it, and exporting countries recycle those earnings into US assets.
That structure, formalized in the 1970s through agreements between Washington and Gulf producers, has long sustained global demand for the greenback and reinforced its reserve currency status. The Iran conflict has both reinforced and unsettled that system.
Oil, dollar move in tandem
Oil prices surged in the immediate aftermath of US and Israeli strikes on Iran on Feb. 28, triggering a sharp repricing across currencies and bond markets.
Brent crude climbed roughly 25% in the weeks that followed, while the dollar strengthened against most major peers. That correlation marked a break from the typical pattern, where rising oil prices tend to weigh on the US currency. Instead, the dollar has moved in tandem with oil.
“Oil markets continue to set the tone in FX,” said Alex Cohen, a foreign-exchange strategist at Bank of America, pointing to recent price swings tied to developments around the Strait of Hormuz.
Costly oil boosts US dollar
Strategists and investors say the shift reflects structural changes in the US economy as well as the mechanics of global oil trade. The US is now one of the world’s largest energy producers, insulating it from supply shocks that hit import-dependent economies harder. At the same time, because oil remains priced in dollars, any spike in crude prices increases global demand for dollar liquidity.
“Higher oil prices mechanically improve the US terms of trade and increase global demand for dollars to transact energy,” said Neil Sutherland, a portfolio manager at Schroder Investment Management.
The result has been a renewed “petrodollar impulse,” with markets effectively treating the US currency as a proxy for energy exposure. Some analysts have gone as far as describing the dollar as a “petrocurrency” during the conflict, reflecting how tightly it has tracked crude prices since late February.
War also exposing cracks
Yet the same dynamics strengthening the dollar in the short term are exposing vulnerabilities in the system over a longer horizon.
The Strait of Hormuz, through which roughly a fifth of global oil flows, has become a focal point of both military and financial pressure. Disruptions to shipping have amplified price volatility and forced energy buyers to rethink supply chains and payment mechanisms.