The Dollar's Suez MomentHi and happy start of the new trading week – which will probably be quite eventful!
Most traders watching oil and yields right now are asking the right question — what does this mean for my positions? Fewer are asking the deeper one: what does this mean for the dollar itself?
The Iran conflict isn't just a Middle East story. It's a stress test for an arrangement that has quietly underpinned the dollar's global dominance for half a century. And the results so far don't look great for the US.
The deal behind the dollar
After the collapse of the gold standard in 1971, the US faced a problem. The dollar had lost its anchor. The US administration needed a new one.
The solution emerged from a simple observation: the world runs on oil, and oil needed a pricing currency. Through a series of agreements in 1973 and 1974, the US and Saudi Arabia built what became known as the petrodollar system. The mechanics were straightforward. Oil would be priced and traded in dollars. The US would provide military protection and political guarantees to Saudi Arabia and the Gulf states. In return, the surplus oil revenues — petrodollars — would be recycled back into US Treasury bonds and dollar-denominated assets.
It wasn't a single signed contract. It was a strategic understanding — historians still debate how formal the arrangement ever was, but the outcome was the same regardless of the paperwork. And it worked extraordinarily well for both parties.
The consequences for the global financial system were enormous. Every country that needed to buy oil needed dollars first. That created permanent, structural demand for the dollar from every economy on earth. Central banks accumulated dollar reserves. Dollar-denominated debt became the standard. And the US could run deficits that would have broken any other country — because there was always a buyer for its debt.
This is what economists call the "exorbitant privilege." The US gets to live beyond its means because the world has no choice but to fund it. The petrodollar arrangement is where that privilege was born.
What the deal required the US to deliver
The arrangement had an implicit promise from the US side: security. Not just words, but credible military deterrence in the Gulf. The whole logic only holds if other powers believe the US will act when the infrastructure is threatened.
For decades that credibility held. During the Iran-Iraq tanker wars of the 1980s, the US Navy escorted Kuwaiti oil tankers through the Gulf under Operation Earnest Will — a direct demonstration that Washington would protect the free flow of energy when the arrangement demanded it.
That belief has since been tested again, and more recently it has started to crack.
In September 2019, Iranian-made drones and cruise missiles struck the Abqaiq and Khurais facilities — the largest and most critical oil processing infrastructure in Saudi Arabia. The attack knocked out over 5 million barrels per day of Saudi production overnight, the largest single outage in the modern history of oil. The Aramco CEO publicly stated that an absence of international resolve was emboldening the attackers. Trump tweeted that the US was "locked and loaded." No retaliatory military response followed.
The infrastructure was repaired. The incident was absorbed. But a signal had been sent to every government watching: the US umbrella has gaps.
A waterway that changes everything
The current Iran conflict raises the stakes considerably. The Strait of Hormuz is the single most important chokepoint in global energy markets — roughly 20% of the world's daily oil consumption passes through it, along with around 20% of global LNG trade and significant volumes of other commodities including fertilizers and helium. Oil is the focus here, but the broader point is this: Hormuz is not a niche waterway.
Closing it, even temporarily, would send shockwaves through every oil-dependent economy on earth. Unlike a drone strike on processing facilities, a Hormuz closure cannot be quietly repaired. It requires a military response or a negotiated reopening. Every day it stays closed, the question echoes louder: can the US project sufficient force to reopen it? Will it?
Trump called on allies across Europe and Asia — and even China — to send warships. No country publicly committed.
This happened once before
The pattern is not new. Seventy years ago, Britain faced a strikingly similar moment.
In 1956, Egypt's President Nasser nationalised the Suez Canal. Britain and France, with Israel, launched a military operation to retake it. Militarily, the operation succeeded quickly. Then the US stepped in — not to help its ally, but to end it. Eisenhower threatened to sell US holdings of British pounds, flooding the currency market and forcing a devaluation. He blocked IMF loans. He refused to supply oil unless Britain accepted a ceasefire. The US Treasury Secretary told his British counterpart directly: there would be no American money until British troops were out of Egypt.
Britain withdrew. The pound sterling was the world's second reserve currency in long decline — Suez finished the question. Countries across the sterling area began converting their pound holdings into dollars. The process that had been gradual became irreversible. Britain's era as a global power ended not on a battlefield but in a currency market. The lesson drawn by historians was simple: the moment a power can no longer assert its will over a strategic waterway, it removes any remaining doubt about the financial architecture built on that power.
Seventy years later, the US finds itself in a very similar position to the one Britain was in 1956. A strategic waterway. A challenged ability to project force. Allies who didn't show up. To be fair, the parallel has limits — the US enters this moment from a position of considerably greater financial and military depth than Britain had in 1956. The dollar's institutional advantages are not Britain's thin reserve position. But the structural similarities are hard to ignore.
The process that's already underway
Here is the important caveat, and it matters: de-dollarization is not a sudden event. It is a slow, structural process. Anyone waiting for a single announcement that the dollar is finished will wait forever.
Ray Dalio has been writing about this transition for years — the historical cycle of reserve currencies and the shift toward a multipolar financial world. When he was writing about it, few outside specialist circles were paying attention. The broader conversation only entered mainstream awareness more recently — most visibly when Canada's Prime Minister referenced it at Davos earlier this year, which prompted a wave of political leaders to claim they had always understood that old world order is not working anymore. That's how these things work. The process moves slowly, then suddenly it's in the room.
But the data was already there for those looking. Central banks worldwide have been quietly reducing their dollar reserves and buying gold at the fastest pace since the 1950s — three consecutive years above 1,000 tonnes annually. Some BRICS nations have been exploring alternatives for trade settlement. China and Russia have been conducting bilateral energy deals in local currencies.
The EU dimension is perhaps the least discussed — and arguably the most significant. The EU is the world's largest energy importer. It has historically priced that energy in dollars, in part because the US military umbrella over the Gulf made dollar-denominated energy the path of least resistance. Worth noting: Europe isn't the main buyer of Gulf oil by volume — Asia is, receiving roughly 85% of Hormuz crude flows. But the dollar pricing question is separate from the physical flow question, and it's on the pricing side where Europe's weight is felt.
The current US administration has pushed Europe toward full strategic autonomy (although it prefers to see Europe divided)— on defense, on energy, on trade. If Europe no longer needs or receives that military umbrella, the incentive to price energy in dollars weakens accordingly. An autonomous Europe buying the world's largest volume of energy on its own terms has no structural reason to insist on dollar settlement. The US could threaten tariffs in response — and likely would — but that's a negotiation, not a veto. The compliance was always optional — that was simply the arrangement between good allies.
None of this means the dollar collapses. The dollar's advantages — deep liquid markets, legal infrastructure, institutional inertia — are enormous. But there is a difference between the dollar remaining important and the dollar maintaining its monopoly. The exorbitant privilege lives in the gap between those two things.
What this means for markets
For traders watching these dynamics, a few markets are more directly exposed than others.
Dollar pairs such as EUR/USD are the most direct read on dollar status over time — though in the short term, crisis conditions often paradoxically strengthen the dollar as a safe haven.
Gold — the traditional alternative reserve asset. Central bank accumulation is already visible in the data and has been running at historically elevated levels for three years. Gold doesn't need the dollar to fail for it to benefit — it only needs the dollar's monopoly to weaken.
US 10-year yields — if foreign demand for US Treasuries softens, yields need to rise to attract buyers. Longer-term structural question is who finances US debt if petrodollar recycling slows.
Oil — the most direct exposure to the Hormuz situation. The near-term volatility is obvious. Interesting question is what happens to oil pricing mechanisms if the petrodollar arrangement continues to erode.
If the US succeeds in projecting sufficient force and the Hormuz situation resolves, some of this reverses in the short term. The dollar might rally. Yields might pull back. Oil might settle. But the structural process doesn't reverse with it. Britain "won" militarily at Suez in 1956 too. That didn't change what followed.
We may be watching a Suez moment for the dollar. Not the end of something — the beginning of a long transition.
Thank you and enjoy your trading!
