War on Iran could be ‘catalyst’ for erosion of US petrodollar, Deutsche Bank says

By Sean Mathews
26 March 2026

The petrodollar helps keep borrowing costs down for US consumers and Washington, giving them big advantages over peers

The US-Israeli war on Iran could usher in the end of the petrodollar, a key pillar of the US’s financial heft in the world, according to a new report by Deutsche Bank.

“The huge strategic importance of the Middle East to the dollar’s role as the world’s reserve currency should not be underestimated. The current conflict could test the foundations of the petrodollar regime,” Deutsche Bank researcher Mallika Sachdeva wrote in a special report this week.

The petrodollar was born out of an agreement between the US and Gulf states, under which the latter sells their oil to customers across the globe in US dollars and, in return, reinvests those proceeds in the US.

The most common way Gulf states do this is by buying US Treasuries, which generally helps keep interest rates lower. That allows Americans and the US government to borrow more cheaply than their peers.

Saudi Arabia and the UAE are among the top 20 countries holding US Treasuries, with around $250bn in holdings between them.

Saudi Arabia, the UAE, Kuwait, Qatar, and Bahrain all peg their currency to the US dollar. This requires them to keep vast amounts of US dollars, which also helps to support the currency. To maintain the peg when their national currencies weaken, central banks buy back their currencies in US dollars.

The petrodollar system goes back to 1974, after Saudi Arabia agreed to price its oil in dollars and reinvest those funds in US bonds in exchange for American security guarantees.

“The world saves in dollars in large part because it pays in dollars,” the report said.

The petroyuan?

The US turned to Gulf states to support the greenback, another word for the US dollar, after US President Richard Nixon refused to honour the dollar’s convertibility into gold in 1971.

US security is a key pillar of the petrodollar system.

With the US war on Iran raging, Saudi Arabia and the UAE have inched closer to supporting the offensive. For example, Middle East Eye was the first to reveal that Saudi Arabia had opened King Fahd Air Base to the US.

But regional officials and analysts say that in the longer term, the US-Israeli war on Iran has sparked serious doubts about the US’s role as the region’s security guarantor.

Iran has effectively wrested control of the Strait of Hormuz and is determining which vessels pass through the waterway. Policing critical sea lanes is a foundational part of the US’s claim to being the world’s dominant superpower.

Sachdeva, at Deutsche Bank, wrote that the US’s failures to ensure security in the Gulf could unwind the premise on which the petrodollar is built.

“The current conflict may expose further fault, by challenging the US security umbrella for Gulf infrastructure and maritime security for global trade in oil,” she wrote.

“Damage to Gulf economies could encourage an unwind in their foreign asset savings held largely in dollars,” she added.

Energy markets transcend borders

It works both ways. In the 1970s, the US was heavily reliant on Gulf energy, but it has since become energy independent and imports very little from the Gulf. Energy markets transcend borders, but even as gasoline prices in the US rise due to the war, Asia and Europe are facing even higher prices.

US President Donald Trump has complained about how the US should be responsible for the Strait of Hormuz.

“You know, we don’t use the strait…We don’t need it. Europe needs it. Korea, Japan, China, a lot of other people. So, they’ll have to get involved a little bit on that,” he said last week.

Hypotheses about the petrodollar’s demise have been building for years, and accelerated after the US slapped sanctions on Russia over its invasion of Ukraine. China has emerged as a major buyer of Russian oil and gas, which it purchases in a mix of Chinese yuan and Russian roubles.

Ninety percent of Iran’s oil is exported to China. The country is also the top customer of Saudi Arabian crude.

Deutsche Bank said that the US war on Iran could be remembered as “a catalyst for the erosion in petrodollar dominance, and the beginnings of the petroyuan”.
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