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The future of the dollar is causing concern for the markets
In recent years, the debate over the possible decline of the US dollar has taken centre stage in financial markets and geopolitical scenarios. International tension, the return of Donald Trump, trade wars and new conflicts in the Middle East have reignited questions about the future of the petrodollar.
The crisis involving the United States, Israel and Iran, together with the risks linked to the Strait of Hormuz and oil price volatility, has led many analysts to question the resilience of the economic system built around the US dollar.
But is the petrodollar really destined to fade away or does the dollar’s dominance still remain the cornerstone of the global economy?
What the petrodollar is
The term petrodollar refers to the system whereby oil is traded predominantly in US dollars.
This model was officially established in 1974 thanks to a historic agreement between the United States and Saudi Arabia. Riyadh undertook to sell oil in dollars and to reinvest part of its profits in American financial markets, especially US government bonds. In return, Washington guaranteed military protection and strategic support.
This system strengthened the role of the dollar as the dominant currency in international trade for over forty years.
Why the dollar still dominates
The success of the petrodollar did not depend solely on oil. The United States offered features that no other country was able to guarantee:
- liquid financial markets
- monetary stability
- geopolitical security
- free movement of capital
- a reliable legal system
For years, even many countries hostile to Washington continued to use the dollar in international energy trade, simply because there were no other credible alternatives.
Cracks in the petrodollar system
In recent years, signs of a shift in the global balance of power has emerged.
Tension in the Middle East has highlighted how the United States is no longer perceived by everyone as the absolute guarantor of regional stability. At the same time, Saudi Arabia and the United Arab Emirates have strengthened their economic ties with Asia, especially with China.
Beijing is, in fact, actively promoting the use of the yuan in international oil trade. A growing proportion of Saudi exports to China is already being settled in Chinese currency rather than in dollars.
China, Russia and Iran challenge the dollar
One of the most significant factors concerns the emergence of financial systems that offer an alternative to the dollar.
Russia and Iran, hit by Western sanctions, have stepped up their search for tools capable of reducing their dependence on the American currency.
Emerging alternatives include:
- payments in yuan
- alternatives to the SWIFT system
- bilateral agreements in local currencies
- the use of cryptocurrencies
Saudi Arabia has also joined the mBridge project, an international platform developed together with China, Thailand, the United Arab Emirates and Hong Kong.
The role of Donald Trump
According to many international observers, Donald Trump’s aggressive policies have contributed to weakening the global image of the United States.
Trade tension with Europe and China, combined with complicated relations with historic allies such as Japan and South Korea, have fuelled doubts about American political stability.
This aspect is crucial because the value of the dollar also depends on international confidence in the United States.
Is the petrodollar really over?
Despite the changes currently underway, many economists believe it is premature to talk of the end of the dollar.
Today, the global financial system is far more complex than it was in the 1970s. Sovereign wealth funds from countries in the Gulf are increasingly investing in:
- technology
- stocks
- property
- infrastructure
- emerging markets
For this reason, some analysts argue that the very concept of the petrodollar belongs to a historical era that is now behind us.
New energy players
The global energy landscape has also changed profoundly.
Alongside the traditional producers in the Middle East, new energy powers are emerging, such as:
- Canada
- Brazil
- Norway
- Kazakhstan
- Azerbaijan
- Guyana
At the same time, Asian economies are becoming increasingly central thanks to industrial and technological growth.
Why the dollar remains dominant
Despite everything, the dollar continues to hold a dominant position in the global economy.
Its strength depends less and less on oil and increasingly on the structure of the international financial system. Indeed, a huge proportion of world trade continues to be settled in dollars.
The dollar remains:
- the most liquid currency
- the most widely used in financial markets
- the world’s main reserve currency
- the easiest currency to convert
The weight of offshore dollars
One of the lesser-known aspects concerns the market for so-called offshore dollars.
Banks and financial institutions around the world create dollar-denominated instruments even outside the United States. This has generated a massive global financial ecosystem based on the US currency.
Confidence in the dollar continues, in fact, to be supported by the belief that the United States will always intervene to guarantee liquidity and stability during international financial crises.
Conclusions
The petrodollar system is undergoing a phase of transformation.
China’s growth, the spread of alternative payment systems and the use of the yuan in energy trade are eroding the dollar’s absolute monopoly. Nevertheless, the dominance of the American currency still appears very solid.
The real central issue concerns not only oil but global confidence in the financial system built around the United States.
As long as governments, banks and markets continue to regard the dollar as the most stable and secure currency for international trade, its dominant role is unlikely to be replaced in the short term.
