US-Iran War Reshapes Currency Landscape

The outbreak of the US-Iran war at the end of February 2026 triggered a conflict whose consequences extend well beyond the battlefield. Iran's decision to close the Strait of Hormuz – the chokepoint through which around one-fifth of the world's traded oil transits – constitutes the most severe disruption to global energy flows in half a century. And its selective enforcement regime, which reportedly conditions passage on non-dollar payment, has injected currency choices directly into the physical oil trade.

 

These developments coincide with a turbulent period of international monetary order, in which energy security, financial sanctions, and currency competition are increasingly inseparable. Since the collapse of the Bretton Woods system, the petrodollar system has functioned as a crucial foundation of US dollar hegemony, linking global oil trade to dollar invoicing, the recycling of oil revenues into US financial assets, and the expansion of dollar-demoninated financial intermediation. The system is not built on monetary influence alone, it also rests on a key geopolitical bargain: the US would secure Gulf energy flows and provide access to its financial markets, while major oil exporters would continue to anchor oil trade in dollars. This bargain has become more fragile before the conflict amid sweeping geopolitical shifts, and the crisis has further laid bare the core vulnerabilities of the petrodollar system.

 

Hence, the Iran war raises a fundamental question regarding the evolution of global currencies: what are the implications of the war for the dollar-based international monetary order and for RMB internationalization? A rigorous analysis of this question is vital to understanding and anticipating the underlying forces reshaping the international monetary system.

 

The Petrodollar System and Dollar Hegemony

The formal origins of the petrodollar system can be traced back to the 1970s, after the collapse of the Bretton Woods international monetary order. Back then, the enduring current account deficits and loosened monetary discipline of the US made foreign central banks increasingly reluctant to hold depreciating dollars and choose to convert their reserves into gold, finally leading the Nixon administration to suspend dollar–gold convertibility in August 1971, which factually terminated the Bretton Woods system. With the dollar losing gold backing, the urgent problem of the US was to sustain dollar hegemony via establishing a new anchor of dollar's global demand. Under the background of global oil crisis and supply interruption in the 1970s, a key component of the new anchor was petroleum. In 1974, the US and Saudi Arabia reached a series of strategic understandings, anchored by a formal Joint Commission on Economic Cooperation and a confidential arrangement brokered by then US Treasury Secretary William Simon. Under the agreement, the US would provide military aid, equipment, and security guarantees to the kingdom; in return, Saudi Arabia would invest its growing oil revenues in US Treasury securities and use its leadership within OPEC to consolidate the convention of pricing and settling oil exclusively in US dollars. This laid the foundation for the petrodollar system.

 

The petrodollar system underpins and reinforces dollar hegemony through three interlocking pillars. The first is petrodollar invoicing, referring to the widespread practice that crude oil is priced, invoiced and settled predominantly in US dollars. This pillar directly bolsters dollar demand by tying the currency to transactions of the world's most vital energy commodity, regardless of whether the US is a counterparty. Indirectly, driven by micro-level risk hedging and efforts to minimize transaction costs, dollar invoicing has spread across global supply chains. Since oil is a key upstream input for economy, this trend further sustains global demand for the dollar.

 

The second is petrodollar recycling, referring to the process by which oil-exporting states channel their dollar-denominated petroleum revenues back into US financial assets. This recycling happens directly as their central banks and sovereign funds acquire US treasuries and other financial assets, or indirectly through their imports mainly from Asian surplus countries, whose surpluses also flow largely into US financial assets¹. The recycling process provides key sources of US deficit funding and external demand for US treasuries.

 

The third is petrodollar financing, referring to the broader dollar-based funding and related financial intermediation infrastructure. A vast ecosystem of dollar-denominated financial services, such as dollar-denominated lending, trade finance, hedging instruments, provided by global banks and other financial intermediaries in London (offshore) and New York (onshore) has developed and expanded on the back of petrodollar invoicing and recycling. The ecosystem generates strong network effects and high switching costs, entrenching dollar dominance in cross-border financing, payments and forex markets.

 

These pillars reinforce one another and form a self-sustaining cycle that underpins the dollar's status as a leading reserve currency across five key areas: reserve assets, trade invoicing, cross-border payments, cross-border financing and forex markets. Petrodollar invoicing prompts oil importers to acquire dollars for trade settlement and oil exporters to use dollars for import payments and US asset purchases. This, in turn,creates greater demand for dollar financing and hedging, making dollar funding markets deeper, more liquid and cost-effective.

 

Pre-war Strains in the Petrodollar System

The stable operation of the petrodollar system rests on two geoeconomic and geopolitical cornerstones. First, the US and its western allies have long been the world's major oil consumers, while Gulf states serve as primary suppliers. Second, the dollar-denominated arrangement and infrastructure operate smoothly with no major interruptions, especially due to geopolitical reasons. Yet recent years have seen both foundations undergone significant structural changes, putting the petrodollar system undermounting pressure.

 

First, fundamental changes in global geoeconomic power and oil supply-demand dynamics have called into question the underlying logic of the petrodollar system. On the supply side, the US became a net petroleum exporter in 2020, and has remained a major petroleum and energy exporter ever since. In 2024, the country exported 55% of its domestic crude oil and natural gas plant liquids production, and set multiple records for energy production and exports, according to data from US Energy Information Administration. This makes the economic relationship between the US and Gulf states shift from complementarity toward competition, and makes the traditional petrodollar recycling loop – the US imports oil by paying dollars, and oil exporters reinvest petrodollars into US financial assets – has become far less central to the US balance of payments.

 

On the demand side, global oil demand has shifted decisively toward emerging economies, particularly to China, India and other Asian countries. China overtook the US as the world's largest crude oil importer in 2017 and has remained in that position thereafter, while India emerged as the third-largest importer by country (Figure 1). In 2024, around 72% of crude oil exports of OPEC member countries went to Asia, while the share of US and its western allies continued declining, according to OPEC official statistics. Such demand shift carried profound monetary implications: as emerging Asia countries become major oil importers, the logic of invoicing and settling oil transactions in dollar becomes less intuitive and more costly for the parties involved. For oil importers, especially China, they have to acquire and hold vast dollar reserves to pay for oil, exposing themselves to dollar exchange-rate risk and US monetary-policy spillovers, while receiving none of the reserve-currency privileges that the dollar conferred. For oil exporters, they import more manufactured goods from China than from the US, yet continuously accumulating more dollars than their evolving economic relationships warranted. Thus, the petrodollar system becomes increasingly less beneficial to major oil importers and exporters, except for the US itself.

 

Furthermore, advances in global energy transition poses an external shock to the oil industry. With fast development of renewable energy technologies and supplies, the world faces structural oversupply of fossil fuels in the long term, exerting downward pressures on oil prices and urges oil-exporting economies to accelerate economic restructuring. The external shock brings more stress to the petrodollar system: on the one side, non-US oil exporters face shrinking petrodollar revenues, which compresses their surpluses available for recycling into US assets and dimmish their strategic incentives to maintain the dollar-pricing convention; on the other side, they need to import more manufactured goods from countries like China to facilitate domestic economy transition, further reducing their incentives to hold dollar.

 

Second, the fast-evolving geopolitical landscape, growing rifts between the US-led West and the global South, and the increasing weaponization of the dollar for geopolitical purposes have added fresh strains to the petrodollar and accelerated the erosion of its foundations. A pivotal turning point came with the unprecedented Western financial sanctions imposed on Russia after the 2022 Russia-Ukraine conflict, which impacted the petrodollar in two key ways. First, Russia, one of the world's top oil exporter, redirected its oil shipment away from Western markets toward emerging Asia countries, mainly China and India.Second, Russia was forced to settle oil trades using non-dollar and non-euro currencies. Data from the Bank of Russia shows that between January 2022 and December 2024, the share of currencies from "unfriendly" countries in Russia's export settlements plunged from 87% to 18%. Meanwhile, over 90% of bilateral trade between Russia and China was reportedly settled in RMB or ruble. These shifts have created divisions within global oil trade and weakened the dollar's dominance in oil pricing, invoicing and settlement.

 

Worsening geopolitical tensions and dollar weaponization have also prompted other major oil-exporting nations to diversify their trade settlement currencies. Saudi Arabia, the linchpin of the original petrodollar system, was invited to join BRICS and granted dialogue partner status in the Shanghai Cooperation Organization, signaling its broader hedging strategy between the US-led financial order and China-centered non-Western multilateral frameworks. In 2023, Saudi Arabia publicly stated its readiness to settle trades in currencies other than the US dollar. In 2024, its central bank jointed the BIS-led Project mBridg, a platform designed to facilitate cross-border payments outside the SWIFT network, alongside China and several other Asian economies. Additionally, Saudi Arabia chose not to formally renew its longstanding, albeit informal, commitment to pricing oil exclusively in dollars in 2024.

 

The cumulative effects brought by the geoeconomic and geopolitical changes on the petrodollar system are non-trivial. Although the dollar still dominated the global energy trade, a meaningful minority of the trade began to migrate toward RMB-denominated or local-currency settlement where three factors coinside: China acts a major trading partner, sanctions or geopolitical risk make dollar usage prohibitively costly, and countries accept relatively lower currency liquidity in exchange for greater strategic independence. These forces had already created structural fractures and intensified strains across the petrodollar system by 2026.

 

The War's Disruption to the Petrodollar System

 

Iran's Tactical Responses Against the US – Israel Invasion

The US and Israel launched coordinated airstrikes against Iran on 28 February 2026, and the war is still not formally ended. Iran's response to the invasion was not limited to conventional military retaliation. Rather, it adopted a broader strategy of asymmetric geoeconomic coercion via using its geographic position along the Strait of Hormuz and its sanctions-resistant oil trade networks, directly targeting vulnerabilities of dollar-based energy markets.

 

The first and most consequential response was Iran's decision to weaponize the Strait of Hormuz, the narrow corridor through which approximately 20% of globally traded petroleum and a substantial share of LNG shipments had historically transited. Soon after the invasion, Iranian forces declared the Strait "closed" and threatened to attack vessels attempting to transit the waterway. By disrupting the chokepoint of global energy trade, Iran turned the war into a systemic shock to global oil pricing, shipping insurance, and LNG trade.

 

Second, Iran introduced a selective closure enforcement regime and imposed a toll system on vessels transiting the Strait. While the Strait was declared closed to vessels aligned with the US and its allies, ships from "friendly" nations could negotiate passage by paying transit fees in Chinese RMB routed through CIPS or in cryptocurrency. This move effectively links passage through the world's most important oil chokepoint to non-dollar energy settlement via establishing an RMB-denominated toll system.

 

Third, Iran linked de-escalation to sanctions relief and restoration of its access to global oil market. In its reply to a US peace proposal, Iran demanded sanctions removal, unblocking of Iranian assets, end to the US naval blockade, and recognition of Iranian sovereignty over the Strait. The moves convert battlefield pressure into financial bargaining – Iran challenged not only US military power, but also the dollar-based sanctions system.

 

Taken together, Iran's tactical responses to the US–Israel invasion centered on exposing a major vulnerability of the petrodollar system: dollar hegemony depends not only on financial depth, but also on US's credibility of securing maritime flows, protecting its Gulf partners and energy infrastructure, and keeping effectiveness of financial sanctions.

 

Impacts on the Petrodollar System

The war and Iran's tactical responses became the most significant stress test of the petrodollar system since 1970s. With the Strait of Hormuz effectively closed and a major portion of global oil flows physically disrupted, all three pillars of the petrodollar system face significant, albeit differentiated, challenges. The strains of the whole petrodollar system and conventional circulating mechanisms also become much more severe than the pre-war period.

 

The petrodollar invoicing and settlement pillar would be impacted through the expansion of alternative non-dollar settlement channels during the war, which weakens dollar's dominance in this sphere. Although Iran cannot directly impede petrodollar invoicing and settlement, by interrupting global oil flows physically and exerting RMB-denominated toll system on vessels transiting the chokepoint, it successfully raised difficulty and costs for Gulf oil exporters to settle trades in dollars, an approach that had already lost favor before the war.

 

The petrodollar recycling pillar would be impacted through the combination of quantity, expectation and portfolio channels. Firstly, oil price increase may not compensate the revenue loss due to physical interruption of oil-exporting flows of Gulf states, which would reduce their export revenue in the period of increasing fiscal expenditures². The longer the managed closure lasts, the more loss they would face. The shrunk surplus would directly reduce Gulf states petrodollar flows to US treasuries and other financial assets. Secondly, a core element of the petrodollar system was US's military protection to Gulf oil exporters. Yet Iran's strikes against some of the states and Trump administration's attitude and reaction raised questions on the willingness and effectiveness of US military protection. As the expectation of safety guarantee from the US weakens, the Gulf states would have less incentive to fully hold their reserves in dollar assets. Thirdly, the war's impacts on oil-exporting countries appear uneven: the US-sanctioned exporters such as Russia or Iran itself are less suffered by the Iranian closure of the Strait, while the non-sanctioned exporters are more affected. This would create differentiated oil revenue flows to the two types of exporters, which would reduce petrodollar recycling to the US as the sanctioned exporters have far less incentive and options to invest in US financial assets.

 

The petrodollar financing pillar will face indirect impacts as the oil-price shock feeds into inflation, interest rates, and global financial conditions. The sharp increase in oil price significantly raised global stagflation risks, which have made major central banks such as the Fed and the ECB postpone rate reductions, and the US long-term treasury yields increase (Figure 2). The longer the war lasts, the higher the stagflation risks would be, and the more constrained financial conditions the world would face. The combination of higher oil prices, higher stagflation risks, and higher financial market uncertainty, together with more frequent interruptions of dollar financial infrastructure, would bring more negative impacts to petrodollar financing demand and the effective operations of its ecosystem.

 

Therefore, the war's toll on the petrodollar system are comprehensive yet asymmetric, and the effects on the three pillars are compounding rather than merely additive. The differentiated impacting mechanisms and their reacting loops would accelerate the pre-war trends of invoicing diversification and payment fragmentation of global oil and energy trade, further widening cracks of the petrodollar system and increasing its strains.

 

RMB's Moment

 

RMB's Foundations as an Alternative Energy Currency

China has been promoting RMB internationalization and endeavoring in constructing an RMB-based financial infrastructure for a long time. By the time the Iran war erupted, China had established a parallel financial architecture whose components could collectively provide the invoicing, clearing, settlement, financing and hedging capabilities necessary for non-dollar energy transactions, hence laying RMB's foundations as an alternative energy currency.

 

The cornerstone of the architecture is the CIPS launched by the PBOC in 2015 as a real-time gross settlement system for cross-border RMB transactions. CIPS has experienced a 36-fold expansion in annual growth since its launch, with annual business volume reaching 180 trillion yuan in 2025 and daily clearing volumes exceeding 750 billion yuan, according to official CIPS data. As of April 2026, the system connected 194 direct participants and over 1,590 indirect participants across more than 120 countries. The fast expansion both in transaction volumes and network participants of CIPS signals accelerating adoption of RMB as a viable alternative energy trade clearing and settlement currency, particularly among BRICS nations and energy exporters seeking to reduce exposure to potential sanctions.

 

Complementing CIPS are several additional layers of international RMB financial infrastructure and arrangement. First, China maintains bilateral currency swap agreements with more than 30 central banks, including key Gulf oil exporters such as Saudi Arabia and the UAE, which provide emergency RMB liquidity that facilitates trade settlement without dollar intermediation. Second, the Shanghai International Energy Exchange (INE), which launched RMB-denominated crude oil futures in 2018, has evolved as the world's third-largest oil futures market by trading volume, and has begun to serve as a pricing anchor and preference for Asian buyers. Third, the mBridge project that involves central banks or monetary authorities of China, China's Hong Kong, Thailand, the UAE, and Saudi Arabia, reached minimum viable product stage in mid-2024 and could provide a platform for faster, more direct cross-border settlement using central bank digital currencies outside the SWIFT network.

 

Taken together, these infrastructures and arrangements form the institutional scaffolding for a functioning non-dollar energy trade system, which can remain operationally resilient when the dollar-based system is disrupted.

 

RMB's Opportunities After the War

The Iran war brings both direct and indirect opportunities to RMB internationalization. Directly, the war expanded the operational scope and legitimacy of China's parallel financial infrastructure by demonstrating its functionality under extreme conditions. Iran's selective enforcement of the Strait closure, which permits RMB-paying vessels passing through while blocking US aligned traffic, provided the real-world demonstration of RMB-based energy trade functioning as a primary settlement mechanism at a major global chokepoint. The significance lies not in the volumes transacted, which is still small, but in the normalization of the practice of RMB being a substitute energy currency, which would helpful to remove psychological and institutional barriers for further international use of RMB.

 

Moreover, the war validated and expanded the sanctions-resilient energy supply chains that China had built with Iran and Russia. The Iran-China oil trade settled in RMB continued to operate even as dollar-denominated Gulf oil exports collapsed. According to Reuters, China's purchases of Iranian crude reached a record 1.8 million barrels per day in March 2026, even as US sanctions pressure intensified. The fact proves that RMB's parallel infrastructure could sustain large-scale energy imports under wartime conditions, a capability with profound implications. Additionally, the war also reinforced incentives for other Asia oil importers, who found their energy security held hostage to a conflict mediated through the dollar over which they had no control, to diversify their trade settlement and financing currencies, creating more favorable conditions for RMB internationalization.

 

Indirectly, the war has accelerated incentives for global energy diversification away from a narrow fossil fuel source. China is the world's dominant power in renewable energy transition and the downstream supply chains. According to IEA data, China dominates clean-energy manufacturing, accounting for 60–85% of production capacity across multiple supply-chain steps; and it is also world's electric-car (EV) manufacturing hub with over 70% of global EV production in 2024. As the world's clean-energy supply chain becomes increasingly centered on China, a higher share of global energy-related trade invoicing and settlement would gravitate toward RMB, which in turn would create positive feedback loops in other functioning areas of the currency's international use.

 

RMB's Structural Challenges and the Dollar's Counterplay

Despite the opportunities, RMB still faces structural barriers to displacing the dollar as the dominant energy currency. The first is China's capital account regime: RMB is not freely convertible and China still maintains controls on cross-border capital flows to preserve domestic monetary-policy autonomy and financial stability. The regime may create a "petroyuan" recycling problem: oil exporters paid in RMB face more limited options for investing their surplus than being paid in the dollar, especially for countries with more balanced trade with China. The second is dollar's immense advantages in all major areas of reserve currency competition: it still accounts for around 57% of global foreign exchange reserves, roughly 88% of global forex transactions, nearly 50% of cross-border SWIFT payments and over 96% and 74% of trade invoicing in the Americas and Asia-Pacific. Its network and institutional lock-in effects remain strong, which create high hurdles for RMB to compete against it.

 

Furthermore, the US has implemented several strategies to maintain and strengthen dollar's competitiveness. First, the Fed's standing swap lines with major advanced-economy central banks preserve the dollar as the emergency currency in crises. Second, the Trump administration fully embraces dollar stablecoin as a new pillar of dollar hegemony. The GENIUS Act, which was signed into law in July 2025, creates a comprehensive federal regulatory framework requiring 100% reserve backing in dollars or short-term Treasuries of permitted payment stablecoins, aiming to strengthen the dollar's reserve-currency role. Third, the US Treasury has intensified sanctions and sanction enforcements on oil trade with Iran, and has threatened to sanction Chinese financial institutions. The US's strategic logic is clear: if China is building parallel RMB infrastructure, the US should harden its existing measures, digitize the dollar system, increase sanction pressure and close the leak points.

 

Conclusion

The petrodollar system is a core part of the post-Bretton Woods anchor of the US dollar. The system relies on three interlocking pillars: petrodollar invoicing, recycling and financing, which have sustained the dollar's global demand since the 1970s. In recent years, due to significant changes in global geoeconomic and geopolitical landscape, driven by eastward shift in oil demand, US energy self-sufficiency, the global energy transition, and the weaponization of dollar infrastructure, these pillars were under mounting structural strains.

 

The Iran war started in February 2026 is a powerful accelerant of these pre-existing trends. Although the war itself has not brought an abrupt end to the dollar hegemony, nor has it transformed RMB into a full-scale substitute for the dollar, it does cause structural and incremental impacts to the petrodollar system. By exerting managed closure of the Strait of Hormuz, Iran physically severed the most dollar-intensive oil trade corridor, compressed petrodollar recycling flows, transmitted a stagflationary risk shock through global financial markets that impacts petrodollar financing, and demonstrated that RMB-based energy trade could function under extreme wartime conditions. The war exposed the dependence of dollar dominance not only on financial depth and market liquidity, but also on secure energy flows, credible US security guarantees, and the continued effectiveness of dollar-based sanctions and payment infrastructure, all of which are weakening.

 

The petrodollar system and dollar's overall dominance are no longer uncontested, and the Iran war creates an important strategic opportunity window for RMB internalization. China's CIPS, bilateral swap lines, RMB-denominated energy futures, mBridge participation, and expanding clean-energy trade lay the foundations for a broader RMB role in global energy trade, which has strong potential of growing to be a comprehensive "petroyuan" system after the war. However, RMB still faces some major constraints and challenges, especially capital-account restrictions, limited reserve asset depth, insufficient offshore RMB liquidity and dollar's strong network and institutional lock-in effects. Moreover, the US is not passively observing petrodollar's erosion. Dollar stablecoins, the GENIUS Act, sanctions enforcement, and the Fed's liquidity networks represent a new phase of dollar counter-strategy.

 

Therefore, China's response should be pragmatic, and RMB internationalization in the energy sphere should be pursued as a long-term strategy. China should continue to deepen CIPS connectivity and interoperability with regional payment systems, strengthen the offshore RMB markets, expand RMB-denominated pricing, invoicing and settlement of both traditional energy and clean-technology trade, improve financial transparency and policy predictability, and gradually relax capital account constraints and raise attractiveness of RMB reserve assets.

 

GONG Bing is an Associate Professor at the School of Global and Regional Studies, University of Chinese Academy of Social Sciences