Author: Miscellaneous Talks on Seeing the Big Picture from Small Details

Disclaimer: This report is based on the research report "What Does the Iran Conflict Mean for the Dollar: The Perfect Storm for the Petrodollar" published by Deutsche Bank Research Institute on March 24, 2026, and incorporates extended knowledge points from the Q&A discussion. It is for research reference only and does not constitute any investment advice.

Table of contents

• I. The Underlying Logic of Dollar Hegemony
• II. The Historical Origins and Operating Mechanism of the Petrodollar
• III. The Relationship Between Crude Oil and US Treasury Bonds
• IV. Three Layers of Pressure on the Petrodollar System
• V. The Failure of Old Logic in the Current Conflict
• VI. Buffer Factors and Scenario Analysis
• VII. Conclusion: Long-term implications of slow variables

The long-term legacy of the Iranian conflict may lie in its impact on the foundations of the petrodollar system. Since 1974, the petrodollar cycle has underpinned the dollar's status as the global reserve currency: global purchases of oil in dollars → oil-producing countries' surpluses flow back to purchase US Treasury bonds → the dollar's dominant position in international trade is self-reinforcing . However, this system is facing compounded pressures: pre-existing structural cracks, new shocks triggered by the war, and long-term threats from the energy transition . There is a game-like transmission mechanism between crude oil prices and US Treasury yields; understanding these mechanisms is crucial for assessing the impact of the current geopolitical conflict on global asset prices.

Chapter 1 The Underlying Logic of Dollar Hegemony

1.1 From the Gold Standard to the Oil Standard

To understand the current crisis, we must begin with the historical evolution of the dollar's hegemony. The dollar's international status has not been static, but has undergone two major institutional transformations.

Phase One (1945-1971): The Bretton Woods System. After World War II, the United States, with its overwhelming economic and military strength, dominated and established an international monetary system centered on the US dollar. Central banks around the world could exchange gold for gold at a fixed exchange rate of $35 per ounce from the Federal Reserve. The US dollar was essentially a "gold receipt ," and its credibility was based on the US gold reserves.

The second phase (1971 to present): The era of a purely fiat dollar. In August 1971, President Nixon announced the decoupling of the dollar from gold (known as the "Nixon Shock"), and the Bretton Woods system collapsed. The dollar thus entered the era of a purely fiat currency , its value no longer backed by gold reserves, but relying on the sovereign credit of the United States and the continued global demand for dollar assets.

Key question: After gold was decoupled from the dollar, what has maintained the dollar's global dominance? — The petrodollar system.

1.2 Why does "the world saves in US dollars" stem from "the world pays in US dollars"?

The dollar's status as a reserve currency is essentially a derivative of its status as a trade currency, not the other way around . Many people believe the world uses the dollar because the United States is powerful, but a more accurate causal chain is:

• Global oil transactions are priced and settled in US dollars.
• Oil is a core cost input for all manufacturing industries (from petrochemical products, fertilizers, transportation to factory operations).
• Businesses naturally tend to price their final products in US dollars, thus creating a natural hedge against dollar costs.
• The global trading system is therefore denominated in US dollars, resulting in a large dollar surplus.
• These surpluses are primarily invested in U.S. Treasury bonds, creating structural demand for dollar assets.
• Central banks around the world accumulate dollar reserves to provide liquidity support when their currencies come under pressure.

This is a self-reinforcing closed loop, with the dollar pricing mechanism for oil as its core driving force .

1.3 Network Externalities: Why the Dollar Hegemony Is So Difficult to Shake

In economics, there's a concept called "network externality"—the more users a currency has, the higher the value of each participant's use of it . This is entirely consistent with the logic of telephone networks and social media platforms. The network effect of the US dollar manifests on three levels:

• Liquidity advantage: The US dollar asset market has the deepest and broadest global market, the smallest bid-ask spread, and the lowest impact cost of large-scale transactions, making the opportunity cost of holding US dollar assets the lowest among all currencies.
• Infrastructure advantages: The SWIFT international settlement system and the correspondent banking system both operate with the US dollar as their core, and the default track for global cross-border payments is the US dollar track.
• Advantages of contractual practices: Standard terms of commodity contracts and trade finance letters of credit default to pricing in US dollars. Changing this practice requires simultaneous coordination among global trade participants, resulting in extremely high transaction costs.

This is why "de-dollarization" has been talked about for decades but has progressed slowly. Breaking this network requires a sufficiently large external shock, or a competitor that can simultaneously provide alternative infrastructure, and these two conditions are gradually converging in the current conflict.

Chapter Two: The Historical Origins and Operating Mechanism of the Petrodollar

2.1 1974: An Undervalued Historical Deal

The petrodollar system can be traced back to the 1974 US-Saudi agreement , but the deeper meaning of this deal goes far beyond its literal meaning.

• Historical Context: Following the collapse of the Bretton Woods system in 1971, the US dollar lost its gold backing and faced a severe crisis of confidence. Simultaneously, the Arab oil embargo in 1973 caused oil prices to quadruple within months, leading the US to realize the need to find a new way to anchor the dollar's global status.

  The core of the deal: Saudi Arabia agreed to price its oil exports in US dollars and invest its oil surplus in US Treasury bonds; in return, the US provided security guarantees and military protection. The other Gulf Cooperation Council (GCC) countries subsequently followed suit, forming a collective institutional arrangement.

  Deeper strategic implications: The United States uses military power as collateral to back the credit of the dollar . In essence, after the collapse of the Bretton Woods system, the dollar switched from a "gold standard" to an "oil standard" —its value was no longer backed by gold reserves, but by the geopolitical power to control global energy trade.

Implicit subsidy mechanism: The structural demand from oil-producing countries to purchase US Treasury bonds continuously lowers the financing costs for the US government. This is equivalent to every instance of global economic growth generating energy demand indirectly subsidizing the US Treasury bond market, representing the most powerful and hidden economic advantage of the dollar's hegemony.

2.2 The Self-Reinforcing Cycle of the Petrodollar: Six Nodes

The petrodollar cycle is not a simple causal chain, but a closed loop consisting of six nodes, each reinforcing the others:

The key characteristic of this cycle lies in its self-reinforcing nature: the cost of any single participant exiting is extremely high, as it must relinquish the liquidity and convenience advantages provided by the entire network . This explains why the dollar's dominance has stubbornly persisted even as the United States' international standing has relatively declined.

Chapter 3 The Relationship Between Crude Oil and US Treasury Bonds

Understanding the relationship between oil prices and US Treasury yields is one of the core analytical tasks of this report . This relationship is far more complex than "when oil prices rise, US Treasury yields rise" or "when oil prices fall, US Treasury yields fall"—in reality, rising oil prices simultaneously activate five transmission mechanisms in different directions, and the final net effect depends on the relative strength of these five mechanisms under specific circumstances.

3.1 Mechanism 1: Earnings repatriation effect (suppressing yield)

Transmission path: Oil price increases → Oil-producing countries' dollar income increases → Dollar surplus accumulates → Purchases of US Treasury bonds → Bond demand increases → Yields come under downward pressure.

This is the most direct manifestation of the petrodollar cycle . Taking Saudi Arabia as an example, during the period when oil prices rose from $30/barrel to $147/barrel in the mid-2000s, the dollar surplus of GCC countries increased significantly, and the purchase of US Treasury bonds increased significantly, forming a sustained external demand.

Historical Case: From 2004 to 2006, the Federal Reserve raised interest rates 17 times consecutively, increasing the federal funds rate from 1% to 5.25%, but the 10-year Treasury yield remained almost unchanged. Then-Federal Reserve Chairman Alan Greenspan called this the "interest rate conundrum." One important explanation from academia was the return of petrodollars—the demand for bonds from oil-producing countries driven by rising oil prices continuously suppressed long-term yields.

3.2 Mechanism Two: Inflation Expectation Effect (Pushing Up Yields)

Transmission path: Oil price increases → Energy costs are passed on to all prices → Inflation expectations rise → Market expectations of Fed rate hikes → Short-term yields rise → This in turn drives up long-term yields.

Energy is a fundamental input for industrial production . Rising oil prices will be transmitted to final consumer goods prices through both direct (fuel costs) and indirect (transportation costs, raw material costs) channels, generating widespread inflationary effects . As the ultimate gatekeeper of inflation, the Federal Reserve usually has no choice but to tighten monetary policy and push up market interest rates when faced with inflationary pressures.

This mechanism acts in the opposite direction to the first, forming a hedging relationship. Which one dominates depends on the nature of the oil price shock:

1) Demand-driven oil price increases (increased demand due to global economic prosperity) : Typically, the surplus repatriation effect is stronger, and the yield is relatively low.

2) Supply shock-induced oil price surge (geopolitical supply disruptions) : This typically has a stronger inflationary effect and greater upward pressure on yields.

3.3 Mechanism Three: The Dollar Index Effect (Direction Uncertain)

Transmission path: Oil price increases → Global demand for the US dollar increases (buying oil requires first buying US dollars) → The US dollar strengthens → The conversion cost of US dollar assets for foreign investors increases → Foreign demand for bonds is marginally suppressed.

This mechanism is somewhat covert. Purchasing oil requires US dollars, and rising oil prices mean increased global demand for dollars, pushing up the dollar index. However, a stronger dollar is a double-edged sword for US Treasury bonds:

For domestic investors : No exchange rate impact, demand remains unchanged.

For foreign investors : A stronger dollar means higher costs to exchange their domestic currency for dollars, increasing the real cost of investing in US Treasury bonds and reducing their marginal willingness to buy bonds.

Therefore, the net effect of this mechanism depends on the marginal influence of foreign investors in the US Treasury market, and its direction is uncertain, often weakening the moderating effect of other mechanisms.

3.4 Mechanism Four: Growth Expectation Effect (Depressing Yields)

Transmission path: Oil price surge → Expectations of damaged economic growth → Market shifts to safe-haven assets → US Treasuries, as the world's safest asset, receive capital inflows → Yields decline.

When oil prices surge and fears of an economic recession arise, global funds flock to US Treasury bonds as a safe haven. This "safe-haven effect" can be very strong in extreme cases, even overpowering upward pressure on inflation expectations.

The historical lessons of 1979-1980: The Iranian Revolution triggered a second oil crisis, with oil prices soaring while the global economy fell into stagflation. Federal Reserve Chairman Volcker raised the federal funds rate to 20% to curb inflation expectations. This was an extreme case where the inflationary effect overwhelmed all other mechanisms, illustrating that when supply shocks are sufficiently severe, the Fed's policy response can become a decisive factor in yield trends.

3.5 Mechanism Five: The Effect of Fiscal Deficit (Boosting Rates of Return)

Transmission path: Oil price shock → Energy-importing countries' governments are forced to expand energy subsidies and increase military spending → Fiscal deficits widen → Government bond supply increases → All other things being equal, bond prices fall and yields rise.

This mechanism is particularly prominent in the current conflict. War not only drives up military spending but also forces governments to subsidize energy costs for residents and businesses to prevent social unrest, a dual pressure that widens the fiscal deficit. More importantly, as the size of the US debt continues to expand, the market needs a higher yield premium to absorb the new supply , especially with fewer foreign buyers.

3.6 Comparison of Historical Patterns of the Five Major Mechanisms

Chapter Four: The Three Layers of Pressure on the Petrodollar System

4.1 First layer: Structural cracks existing before the conflict

The process of shaking the petrodollar system began long before the outbreak of the Iranian conflict . The following four structural changes are necessary context for understanding the current crisis:

• Crack 1: The United States is no longer a major buyer of Middle Eastern oil.

The US shale revolution (which began in 2008 and fully erupted in the 2010s) has fundamentally changed the global oil trade landscape . The US has achieved energy self-sufficiency, significantly reducing its dependence on Middle Eastern oil. Currently, Saudi Arabia exports more than four times the amount of oil to China as it exports to the US, and 85% of Middle Eastern crude oil flows to Asia.

There is a profound geopolitical contradiction here: the United States provides security guarantees with taxpayer money, but the primary beneficiary of oil flows is no longer the United States. This contradiction is becoming increasingly difficult to explain to voters at the domestic political level in the United States, creating long-term structural pressure on the US-Saudi alliance.

• Crack Two: Saudi Arabia Promotes Defense Self-Reliance

Under the Vision 2030 framework, Saudi Arabia has set a target of increasing the proportion of domestic procurement in its defense spending to 50%, actively promoting the localization of its defense industry. This is not only an industrial policy, but also a geopolitical signal: when a country is no longer entirely dependent on its allies for weapons supplies, its flexibility in adjusting its political stance increases significantly .

• Crack Three: Project mBridge—Infrastructure that Bypasses the Dollar Orbit

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. Based on blockchain technology, it uses central bank digital currencies (CBDCs) of various countries for settlement, bypassing the SWIFT and US dollar correspondent banking system.

The existing US dollar payment system operates on the principle that cross-border funds typically pass through US correspondent banks, and fund flows are recorded in US ledgers . This allows the US to monitor and sanction global fund flows. The strategic significance of mBridge lies in its establishment of an international settlement infrastructure operating entirely outside the US's purview. The report specifically points out that this system has reached the "Minimum Viable Stage"—meaning it is technically usable and no longer just a concept.

The infrastructure for circumventing sanctions on weapons is in place, one of the most noteworthy structural changes in this crisis.

• Crack Four: Sanctions Give Rise to Alternative Systems

The US sanctions against Russia and Iran have objectively served as a "de-dollarization laboratory." Sanctioned countries have been forced to develop alternative payment methods, leading to a significant amount of trade settled in local currencies between Russia and Iran, Russia and China, and Russia and India. These experiences and infrastructure will be preserved and disseminated for use by more participants. The "weaponization" of sanctions has a significant backlash effect—the more frequent the sanctions, the stronger the global perception of the vulnerability to dollar dependence, and the greater the motivation for de-dollarization.

4.2 Second Layer: Three Direct Impacts of the Iran Conflict

Impact 1: Damage to the credibility of U.S. security guarantees

Attacks on U.S. military bases in the Gulf region and damage to oil and gas infrastructure are symbolic events whose significance far outweighs their actual losses. The core premise of the 1974 agreement—that the U.S. could provide effective security guarantees—is now being 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 pricing"?

Impact Two: The Political Restructuring of the Right of Passage in Hormuz

Some oil tankers passing through the Strait of Hormuz were granted passage through bilateral diplomacy rather than by U.S. naval power—ships bound for China, India, and Japan received permits . This means that control over this most important global energy route is shifting from "U.S. military power" to "Iranian political will."

The Strait of Hormuz carries approximately 20 million barrels of oil daily, accounting for 20% of global seaborne oil traffic. This is not merely abstract geopolitics, but a real issue directly impacting the ability of factories in Japan, South Korea, and Europe to operate.

Impact Three: The Forced Guidance of the Petroyuan

The most explosive reports come from multiple media outlets: Iran is negotiating with some countries to offer the option of paying for oil in yuan in exchange for passage rights in the Hormuz. If this arrangement is implemented, its significance lies in the fact that the passage rights themselves become a bargaining chip in oil pricing —a new tool that directly links geopolitical control with monetary policy, which can be understood as a coercive version of the "petro-yuan."

Once this mechanism proves feasible, its demonstration effect will be far-reaching. The oil trade route from the Middle East to Asia may gradually form an independent RMB pricing zone, running parallel to the US dollar pricing zone in the Western Hemisphere—this is the core content of the report's "worst-case scenario."

4.3 The Third Layer: Energy Transition – A More Fundamental Threat to the Dollar

A deeper risk than oil for currency 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 is traded across borders.

If Europe reduces its oil imports through nuclear power and renewable energy, the Middle East's export surplus will shrink, trade that needs to be settled in US dollars will decrease, and global demand for the dollar will decline—weakening the petrodollar mechanism even if oil prices are high.

Three transformation paths for energy-dependent economies:

Key warning: The petrodollar system is facing pressure from both "oil" and "dollar" – oil faces pressure to de-dollarize, while the dollar faces pressure from declining demand due to shrinking oil trade.

Chapter 5 The Failure of Old Logic in the Current Conflict

5.1 Profit 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 greater demand for US Treasury bonds. However, the current conflict has broken this pattern: the war has simultaneously damaged the oil and gas infrastructure and production capacity of oil-producing countries, potentially transforming the Gulf economies from surplus-driven to deficit-driven, requiring the use of reserves to repair their economies .

Size reference: The MENA region holds approximately $2 trillion in central bank reserves and approximately $6 trillion in sovereign wealth funds. These assets are primarily allocated to US Treasury bonds. If large-scale redemptions were used for domestic reconstruction, the direction would be exactly the opposite of the historical return of petrodollars—turning them into net sellers of US Treasury bonds.

5.2 Structural pressures on the supply side of US Treasury bonds

To understand the current US Treasury market, it is necessary to consider both the decrease in demand and the expansion in supply:

• On the demand side : GCC reserves may shift from net buying to net selling; China's holdings of US Treasury bonds have decreased from a peak of approximately $1.3 trillion to approximately $770 billion; Japan continues to sell US Treasury bonds to intervene in the foreign exchange market due to pressure on the yen's depreciation.
• Supply side : The US fiscal deficit continues to widen, wartime military spending further increases expenditures, and the outstanding amount of US debt has exceeded $35 trillion, with annual net issuance reaching a record high.

This means that the US Treasury market is undergoing a historic structural shift: from "foreign central banks being stable marginal buyers" to "foreign central banks becoming net sellers," and domestic buyers (the Federal Reserve, pension funds, and commercial banks) must fill this gap , resulting in a rise in the required yield premium.

5.3 Why the US dollar failed to strengthen this time?

Historically, geopolitical crises have typically been accompanied by a stronger dollar (a safe-haven effect) . However, the dollar's performance in this conflict has been far weaker than expected due to a combination of factors:

Positive : The United States' energy self-sufficiency provides a certain safe-haven premium, making it the only major global economy that is both energy independent and geographically distant from battlefields.

Negative (1) : Increased risk of fiscal expansion, sharp increase in military spending exacerbates concerns about the US fiscal deficit.

Negative (II) : Asian and Middle Eastern countries sell off US Treasury bonds to defend their currencies (reverse petrodollar repatriation).

Negative (3) : The petrodollar cycle is weakening, and the automatic mechanisms that historically supported the dollar are failing.

This combination of internal and external troubles explains why the dollar has performed far less strongly in this conflict than historical patterns had predicted.

Chapter Six: Buffer Factors and Scenario Analysis

6.1 The Unignorable Counterforce

Understanding these important buffering factors helps in forming a more complete judgment:

The United States may become the largest oil supplier.

The United States has achieved energy independence thanks to the shale revolution, and if it further integrates resources in the Western Hemisphere (Canada, Central and South America), its reserves will exceed those of OPEC. As the largest supplier, the United States will be able to dominate the pricing terms of oil trade —shifting from "protecting buyers" to "controlling supply," and maintaining the dollar pricing system under the new framework.

GCC countries are deeply tied to the US dollar.

The currencies of the Gulf states are pegged to the US dollar, backed by trillions of dollars in foreign exchange reserves and sovereign wealth funds . The value of these reserves is directly linked to the dollar exchange rate, and any de-dollarization efforts would trigger speculative attacks on their own currencies, creating a strong self-regulating mechanism.

6.2 Scenario Analysis: Three Possible Futures

Chapter 7 Conclusion: Long-term implications of slow variables

7.1 Distinguishing between short-term and long-term

In the short term (1-3 years), US energy independence provides a certain relative advantage , but multiple unfavorable factors offset each other, and the US dollar may remain at a high level but is unlikely to strengthen significantly. US Treasury yields face upward risks under fiscal deficit and inflationary pressures.

More noteworthy are the long-term structural changes (3-10 years or more). The report identifies three long-term paths that suppress the dollar: diversification of oil pricing currencies, a decline in global oil trade volume (energy transition), and countries proactively reducing their dollar reserves for strategic reasons. These three paths are slow-moving variables and will not materialize rapidly in the short term, but once they form a trend, they will be difficult to reverse.

7.2 The most worthwhile signals to track

The following indicators are the most important observation windows for judging the direction of the petrodollar system:

Strait of Hormuz passage arrangements: Will a fixed mechanism for exchanging RMB payments for passage rights be established?

GCC Sovereign Wealth Fund Movements: Has there been a systemic decline in US Treasury holdings in the MENA region?

Project mBridge usage scale: Has actual transaction volume begun to scale?

Saudi Arabia's oil settlement currency: Are there any confirmed non-USD oil contracts?

Nuclear power investment in Europe, Japan, and South Korea: Will it lead to a substantial shift away from fossil fuels in energy planning?

7.3 Final Core Judgment

The report's concluding judgment deserves careful consideration: "A world committed to defense and energy self-sufficiency will also be a world holding fewer dollar reserves." This is not a prediction of a dollar collapse, but a structural assessment of the dollar's slow decline. As the optimal strategy for countries worldwide shifts from "integration into the dollar system" to "reducing vulnerability to the dollar," every node in the petrodollar cycle will weaken marginally. This is a slow variable measured in decades, but its direction has become clearer due to this conflict.