The year was 1974 and President Richard Nixon had dispatched his Secretary of State Henry Kissinger to Saudi Arabia to strike a secret deal. Three years earlier, in August 1971, Nixon had already administered the “shock” that ended the Bretton Woods system governing global finance since World War II — suspending the dollar’s convertibility to gold in a televised address that transformed every major currency overnight. By 1973, the system had fully unraveled.
The world wouldn’t know for another 50 years what Nixon and Kissinger replaced it with, striking a deal that would quietly govern the global economy for the next half-century. Riyadh agreed to price and trade its oil in U.S. dollars and channel its petroleum windfalls back into U.S. Treasury bonds; in return, Washington promised military aid, equipment, and security guarantees—a deal that would quietly govern the global economy for the next half-century.
The existence of this secret agreement wasn’t even publicly confirmed until 2016, when Bloomberg News filed a Freedom of Information Act request with the National Archives. Other OPEC members had followed Riyadh’s lead in the years since, locking in the dollar as the indispensable currency of the modern world. The arrangement had a name only economists used: the “petrodollar” system. It was America’s greatest secret weapon—and today, in the churning waters of the Persian Gulf, it faces its most serious threat since its creation.
The Chokepoint That Moves the World
The Strait of Hormuz is a sliver of water barely 21 miles wide at its narrowest point, separating Iran from Oman. It does not look like the axis of the global economy on a map. But in 2024, roughly 20 million barrels of oil and petroleum products passed through it every day—about 20% of global petroleum liquids consumption and approximately 25% of all seaborne oil trade on Earth.
Qatar and the UAE rely on the strait for virtually all of their LNG exports, representing about 20% of global LNG trade. The bulk of the crude leaving the strait heads to China, India, Japan, South Korea, and other Asian markets, which absorb the overwhelming majority of Hormuz volumes. When Iran slammed shut this door, it didn’t just disrupt shipping lanes. It placed maximum stress on the architecture of dollar dominance at its most physical chokepoint.
For weeks, President Trump has scrambled to respond. He issued a 48-hour ultimatum threatening to “obliterate” Iran’s power plants if Tehran did not reopen the strait. Iran countered by threatening to mine the Persian Gulf and target American energy infrastructure in the region. Trump then postponed his deadline amid what the White House described as diplomatic progress—a face-saving maneuver that former Defense Secretary James Mattis warned could ultimately cede the strait to Tehran’s influence. “You’d see a tax for every ship that goes through,” Mattis said during the CERAweek by S&P Global conference, as reported by Politico.
The administration has cycled through a list of increasingly desperate options, from building a naval coalition—with Trump saying he’d approached “about seven” countries—to a reported proposal to wind down the conflict without resolving the Hormuz closure. As of Monday, Trump told CNBC: “We are very intent on making a deal.”
The $39 Trillion Liability No One Is Talking About
While the gunboat diplomacy dominates the headlines, the more existential danger may be unfolding in the bond market. The U.S. national debt crossed $39 trillion on March 18, 2026, a milestone reached just weeks into the war in Iran. The speed of accumulation is staggering, and the timing could not be worse: interest costs on the debt are projected to become the fastest-growing line item in the federal budget over coming decades, and the U.S. has already suffered credit downgrades from all three major ratings agencies — S&P in 2011, Fitch in 2023, and Moody’s in May 2025.
The reason this matters geopolitically—not just fiscally—goes back to that 1974 handshake. The petrodollar system created a perpetual buyer for U.S. Treasury bonds in the form of oil-exporting nations. The mechanism was elegant in its simplicity: oil exporters accumulated vast dollar surpluses and parked them in U.S. Treasuries, which Washington was only too happy to supply. Saudi Arabia alone held $149.5 billion in U.S. Treasury securities as recently as December 2025 — a figure that, notably, rose by $12 billion over the course of last year, even as Riyadh declined to formally renew the original petrodollar agreement. That recycling loop is what allowed Washington to borrow cheaply, run persistent deficits, and still maintain the world’s reserve currency.
In 1965, French Finance Minister Valéry Giscard d’Estaing was widely credited with a memorable criticism of the Bretton Woods system that predated the petrodollar regime as an “exorbitant privilege” enjoyed by America, with the U.S. dollar serving as the world’s reserve currency. In the 1970s, once President Richard Nixon ended Bretton Woods by decoupling the dollar from gold, that privilege was revived in oil and debt, requiring every country on Earth to accumulate dollars simply to buy oil, and then reinvest those dollars back into American debt. Former Greek Finance Minister Yanis Varoufakis, a heterodox economist whose work sits outside mainstream consensus but who captures something real about the system’s coercive logic, calls this “the global minotaur,” likening the U.S. to the ancient king of Crete who held international trade captive to tribute that would feed the monster within his labyrinth.
The unfolding crisis in the Strait of Hormuz is exposing America’s privilege as a vulnerability. The speaker of Iran’s parliament delivered a warning this week that rattled bond traders: financial institutions backing the U.S. military budget were “legitimate targets,” and buyers of U.S. Treasury bonds were purchasing “an attack on your headquarters and assets.” It was theatrical. It was also a signal—that America’s $39 trillion debt load could become a pressure point in an escalating conflict.
The De-Dollarization Accelerant
Even before Iran closed the strait, cracks in the petrodollar system were visible—though economists caution that “cracks” is very different from “collapse.” The U.S. dollar’s share of global foreign exchange reserves has fallen to roughly 56.9% as of Q3 2025, its lowest level since 1995 and down from a peak of 72% in 2001, according to IMF COFER data. That is a real, multi-decade structural decline. But here is the critical detail most alarming headlines omit: the IMF itself found that roughly 92% of the quarterly decline recorded in mid-2025 was driven by exchange-rate movements—the dollar weakening made non-dollar holdings appear larger—not by central banks actively dumping dollars. (The weakening of the dollar is a whole other story, but Trump’s tariff regime, the exploding national debt and inflation expectations rising are all widely seen as major factors, along with the “Sell America” trade.) There is a meaningful difference between erosion and exodus.
The Chinese yuan, despite years of BRICS advocacy and aggressive promotion of yuan-denominated oil contracts, represents just 2.1% of global reserves. The euro holds second place at roughly 20%, but no single currency has emerged as a credible heir apparent. The Federal Reserve’s own 2025 assessment found that dollar reserve share has been “basically unchanged since 2022,” and that U.S. sanctions on Russia following the Ukraine invasion did not trigger the feared mass reallocation out of dollars.
Saudi Arabia, in fact, chose not to formally renew the petrodollar agreement in June 2024, but the informal, secretive nature of the deal makes it hard to evaluate whether this was a policy change. What the data actually show is that the Saudis still price the overwhelming majority of their oil in dollars; global oil markets remain structurally dollar-denominated; and the network effects that sustain that arrangement—every buyer, every trader, every swap desk globally priced in dollars—do not unwind overnight. As the Hinrich Foundation noted as recently as last week, “talk of de-dollarization is prone to hyperbole,” even as the IMF data confirms a slow, real erosion, because of the weakening dollar.
What the Hormuz crisis means isn’t an end to the petrodollar—it is a threat to accelerate a shift that was previously moving at a glacial pace by raising the geopolitical temperature around a system that had long operated below the radar. Every week the strait stays closed, Asian economies are forced to test alternative supply chains — existing bypass routes like Saudi Arabia’s East-West Pipeline and the UAE’s Abu Dhabi Crude Oil Pipeline to Fujairah absorb only a fraction of normal Hormuz volumes, meaning the pressure to find workarounds is real — and, at the margin, alternative payment mechanisms. If the crisis is resolved in weeks, those experiments are quickly abandoned. If it drags into months, habits begin to form. The dollar’s dominance is not a cliff—it is a long, slow slope—and the question the Hormuz standoff raises is not whether America falls off the edge today, but whether Trump’s handling of this crisis steepens the gradient.
There is a long slope down from this exorbitant privilege, as there remains no obvious successor to the dollar. And for all of Iran’s saber-rattling, its closure of the Strait of Hormuz is not a sophisticated financial weapon aimed at the dollar’s structural foundations. Rather, it is a desperate act of asymmetric warfare by a regime under unprecedented military pressure—a tactical move, not a strategic master plan.
Economic models analyzing the Hormuz closure project global GDP losses ranging from $330 billion in a short conflict to $2.2 trillion if it drags on. Those are serious numbers. But economic disruption is not the same as dollar displacement. If anything, crisis conditions historically drive a flight to dollars, not away from them, because the deep liquidity and institutional trust underpinning the dollar have no match.
Still, the U.S. should pay attention to its own abuses of that privilege. The consequences of sustained erosion are not abstract. The IMF has flagged that the U.S. is more fiscally imbalanced than its peers and that without reserve currency status, its credit position would be far worse. Foreign demand for U.S. Treasuries could weaken, forcing Washington to offer higher interest rates to attract buyers, which would feed directly into the cost of servicing the $39 trillion debt, creating a feedback loop of deficits and borrowing costs that could spiral well beyond the projections of today’s fiscal models. The Committee for a Responsible Federal Budget forecasts annual interest payments of $1 trillion and climbing. Add a prolonged oil shock and the ingredients for a genuine fiscal crisis in the medium term are present.
Trump has said he wants a deal. But his usual playbook, what Yale Management professor Jeffrey Sonnenfeld calls his “ten commandments,” a framework of transactional pressure tactics that served him well against conventional partners, is not working with an adversary like Iran with little left to lose. And time is the one thing the architecture of American financial dominance may no longer have in abundance. The petrodollar system was built in secret in 1974 and sustained quietly for 50 years. The Strait of Hormuz has now made its fragility visible to the entire world, whether or not Trump understood that ordering strikes on Iranian energy infrastructure and military targets would expose the financial architecture those bombs were implicitly defending.
For this story, Fortune journalists used generative AI as a research tool. An editor verified the accuracy of the information before publishing.
