As tensions escalate around the strategic Strait of Hormuz, energy and currency experts agree that while Iran can easily maintain operational control over this critical global waterway, dislodging the U.S. dollar from its decades-long dominance of the global oil trade will prove far out of Tehran’s reach. The standoff over the strait, through which roughly 20% of the world’s energy supplies flow annually, has become the central flashpoint of ongoing regional conflict, with former U.S. President Donald Trump issuing extreme threats against Iran over its claims to influence over the waterway. Tehran has already implemented a structured toll system for vessels seeking passage, allowing entry to ships from allied nations including Pakistan and China, and its decision to denominate these tolls in Chinese yuan has sparked widespread speculation that the petrodollar system – the longstanding arrangement under which global oil is priced and traded exclusively in U.S. dollars – could be facing a fatal collapse.
Iran has strong strategic and economic incentives to challenge dollar hegemony, notes Djavad Salehi-Isfahani, an Iranian economy specialist at Virginia Tech. Decades of sweeping U.S. sanctions have left Tehran locked out of the global dollar-denominated financial system, giving Washington effective veto power over nearly all of Iran’s cross-border financial transactions. But even if Iran solidifies its control over Hormuz, leading currency experts argue that key Gulf oil-producing states – including Saudi Arabia, Kuwait, Iraq, Bahrain, Qatar, and the United Arab Emirates – show no willingness to abandon the petrodollar framework.
“The Strait of Hormuz was a freeway, and it’s going to become a toll road. The Iranians will control it, but king dollar is still king dollar,” explained Steve Hanke, a currency expert and professor at Johns Hopkins University.
To understand the dollar’s enduring hold on global oil markets, it is necessary to trace the origins of the petrodollar system back to 1974, when U.S. Secretary of State Henry Kissinger negotiated a landmark agreement with Saudi Arabia. Under the deal, Riyadh agreed to price all of its oil exports in dollars and reinforces its export surpluses into U.S. Treasury assets, a arrangement that rescued the dollar’s status as the world’s primary reserve currency just three years after President Richard Nixon ended the dollar’s gold convertibility, upending the post-WWII Bretton Woods system.
The 1974 deal produced two transformative outcomes: it sparked the eurodollar boom of the late 1970s, when dollar deposits held in foreign (mostly European) banks became the foundation of global cross-border lending, and cemented the dollar’s global dominance after the 1971 “gold shock” that threatened its status. Following Saudi Arabia’s lead, all other Gulf producers adopted the petrodollar framework, and by the mid-1970s, the region had become the largest single source of new capital for U.S. government borrowing via Treasury bond purchases.
David M Wight, author of *Oil Money: Middle East Petrodollars and the Transformation of US Empire*, notes that the petrodollar system has proven “remarkably resilient” across five decades of geopolitical upheaval. Contrary to popular narratives that frame the system as U.S. coercion of Gulf states, Wight emphasizes that the arrangement was mutually beneficial, built through negotiation rather than strong-arming. In the wake of the 1973 Arab-Israeli War and the Arab oil embargo that worsened U.S. inflation, Gulf leaders sought U.S. security guarantees in exchange for their commitment to the petrodollar, creating a longstanding geopolitical bargain that endures today.
That bargain is why many analysts have argued that Iran’s control of Hormuz could upend the entire system, especially amid shifting U.S. policy: Trump has alternated between threatening to destroy Iran’s civilization and suggesting he would withdraw U.S. forces and allow Iran to take full control of the strait, even telling U.S. allies to “go get your own oil” last week. Today, all Gulf states continue to peg their national currencies to the U.S. dollar, unlike the freely floating euro, and collectively held $315 billion in U.S. Treasuries by the end of 2025, with Saudi Arabia alone holding $134 billion in January 2026.
The geopolitical and economic landscape has shifted substantially since the 1970s, however. The U.S. has grown far more reliant on deficit spending, reducing the relative importance of Gulf investments, while Gulf states have evolved into more mature, diversified investors. In the 1980s, Gulf purchases of Treasuries covered roughly 10% of annual U.S. deficit spending; today, that figure stands at just 2%, according to analysis by former CIA economist Jess Hoversen of Column Bank. U.S. government spending has exploded in recent decades, but a bigger shift comes from Gulf states themselves: many now run domestic budget deficits as they invest heavily in local economic diversification projects, particularly Saudi Arabia’s push to reduce its reliance on oil exports, which led Riyadh to issue $82 billion in sovereign debt in 2025. Gulf states are now net borrowers rather than large net buyers of U.S. government debt, reorienting their surplus capital toward U.S. equities, global alternative assets like European football clubs, and domestic infrastructure.
“Defining the petrodollar today has changed from decades ago,” noted Brad Setser, a former U.S. Treasury economist now at the Council on Foreign Relations. “The Gulf states are borrowers now and not as big buyers of treasuries.”
Still, the system’s underlying vulnerabilities have been laid bare by the recent regional conflict. The Financial Time reported that multiple central banks have sold off large holdings of U.S. Treasuries in response to the U.S.-Israeli war on Iran, driving a sharp surge in 10-year Treasury yields from 3.9% pre-war to roughly 4.4% today. Higher yields raise borrowing costs for U.S. consumers and the federal government alike, and mark an unusual break from historic norms: during periods of global crisis, investors typically flock to U.S. Treasuries as a safe-haven asset, pushing yields down rather than up.
Despite these growing pressures, experts say the deep liquidity of U.S. capital markets – the ability to buy and sell dollar-denominated assets quickly and at scale – remains the core reason Gulf states will not abandon dollar pricing. While Hanke acknowledges that U.S. geopolitical moves including sweeping sanctions, regional wars, and tariffs have eroded the dollar’s standing over the long term and opened space for competing currencies, the unmatched size and liquidity of the U.S. capital market will keep oil priced in dollars for the foreseeable future.
The dollar’s dominance has already faced incremental challenges at the margins. After Western sanctions imposed following its 2022 invasion of Ukraine, Russia now sells most of its oil and gas to China in yuan, and sanctioned Iran also conducts its oil sales to Beijing in the Chinese currency. This bifurcation of the global oil market means that the dollar and U.S. debt markets are not receiving the typical boost they would see during a period of high oil prices and regional conflict: blocked from exporting through Hormuz, Gulf states are not reaping the windfall from elevated energy prices that would normally flow into dollar assets, while major non-Gulf producers like Russia are not reinvesting their profits in dollars.
“We have a meaningful rise in the price of oil, but Gulf countries are not benefiting from it. So who are the big beneficiaries? One is Russia, which won’t save in dollars,” Setser said.
Even as the role of petrodollar surpluses has evolved, Wight argues that the system remains politically and economically critical enough that the U.S. would bring significant pressure to bear on any Gulf state that moved to price oil in an alternative currency like the euro or yuan. “I think there is pressure from the US to keep these transactions in dollars and thus far, the Gulf states have been happy to go along with it,” he said.
As the global reserve currency for the world’s most traded commodity, the dollar is deeply embedded in global trade networks, creating sustained global demand that keeps its value high relative to other currencies. This dynamic actually benefits major export economies like China and the Eurozone, which gain a competitive trade advantage from a weaker domestic currency, meaning even major potential rivals to the dollar have little incentive to push for an end to the petrodollar system.
“There are some advantages to being a reserve currency, but also drawbacks, one of which is that it makes it harder for you to promote your own exports,” Wight explained.
This combination of deep structural inertia, competing geopolitical and economic interests, and the unique liquidity of U.S. dollar markets means that the petrodollar system will remain largely intact despite Iran’s control of the Strait of Hormuz and incremental challenges to dollar hegemony. “There are these challenges at the margins, but it’s hard to unseat the king,” Hanke said.
