At the time of writing, an uneasy calm had returned to the region after the United States and Iran accepted a Pakistani-brokered two-week ceasefire, averting a wider regional conflict. Both countries also began negotiations on Saturday, hosted in Islamabad, the outcome of which hinges on the future of peace in the Middle East.
The war’s economic impact on the world, especially for vulnerable energy-importing economies like Pakistan, is already evident in higher inflation and weakening growth amid rising costs, limited fiscal space, and the growing risk of social unrest, driven by oil supply disruptions in the Strait of Hormuz. International Monetary Fund chief Kristalina Georgieva cautions that the conflict may force downward revisions to global growth and higher inflation, with serious risks.
Beyond the immediate economic shocks of the 40-day confrontation, Tehran’s intention to formalise its control over the Strait of Hormuz by introducing transit tolls in non-dollar currencies and establishing sovereign oversight of the narrow passage through which flows a fifth of the world’s oil has strategic implications for the US-dominated global financial system and the way international trade is conducted.
The move, analysts believe, carries implications for the petrodollar system that has long underpinned the US dominance in global trade and finance. Reports of tankers securing safe passage through the Strait in exchange for payments in yuan point to early signs of alternative arrangements emerging.
The conflict may mark a gradual erosion of the petrodollar and the rise of a petroyuan
Analysts insist that an “unintended consequence” of the US-Israel’s war on Iran could be the gradual erosion of the petrodollar regime, as pressure builds simultaneously on its core pillars: US oil dependence, dollar-denominated energy trade and Gulf security ties with Washington.
In a report titled ‘What Iran means for the dollar: a perfect storm for the petrodollar’, Deutsche Bank strategist Mallika Sachdeva argues that if these “fault lines widen, the downstream effects could be significant for the dollar’s role in global trade, savings and its status as the world’s primary reserve currency”.
Sensing upcoming changes, Pakistan appears to have accelerated efforts to fast-track currency swap agreements with the European Union, the Association of Southeast Asian Nations, Russia, and Iran, modelled on the Pakistan-China arrangement under which Islamabad has accessed a $4.5 billion facility as part of its push to reduce reliance on the greenback.
Besides, the Prime Minister’s Office has directed the finance ministry to operationalise alternative trade settlement mechanisms. The initiative will enable bilateral trade in local currencies, opening new channels, particularly with Russia and Iran, while deepening regional integration.
Authorities are also expanding the use of the Asian Clearing Union for multilateral settlements and promoting regulatory frameworks that facilitate renminbi-denominated trade with China. These steps signal a gradual shift away from dollar-based trade, reflecting broader global trends accelerated by the Middle Eastern conflict.
The dollar remains the world’s reserve currency because global trade is largely priced and settled in dollars through systems like Swift, prompting countries to earn, borrow, and hold dollar assets, and central banks to maintain reserves for stability, reinforcing its global demand.
A key pillar is the petrodollar system, under which oil is priced and traded in dollars. This dates to a 1974 agreement between the US and Saudi Arabia, in which Riyadh priced oil in dollars and recycled surpluses into US debt in exchange for security guarantees, a model later adopted across the Gulf.
Ms Sachdeva is concerned that the Gulf conflict could ultimately undermine confidence in the US security umbrella that underpins the petrodollar regime, potentially prompting regional states to reassess and even unwind portions of their dollar-denominated assets.
Over the longer term, she cautions, a shift toward reduced oil use, deeper Gulf economic alignment with Asia, and any move to price energy outside the dollar could carry significant downstream consequences for the dollar’s role in global trade and savings.
That said, the petrodollar system was already under strain even before the conflict erupted. The US is no longer the primary buyer of Middle Eastern oil, with the shale revolution turning it into a net exporter, while roughly 85 per cent of the region’s crude now flows to Asia, particularly China, intensifying pressure to price oil in alternative currencies such as the yuan.
Simultaneously, Saudi Arabia has been seeking to localise defence production under its Vision 2030 strategy to reduce reliance on US security, while also diversifying financial channels through initiatives like Project mBridge and currency swap lines with China that bypass the dollar and Swift.
Meanwhile, a growing share of global oil trade — particularly from sanctioned producers like Russia and Iran, accounting for around 14pc of global consumption — has already been conducted outside the dollar system, increasingly in yuan, roubles and other currencies.
Together, these structural shifts had begun eroding the foundations of the petrodollar regime well before the war, reinforcing the longer-term trend highlighted by Ms Sachdeva. The ongoing conflict, she observes, risks accelerating these shifts.
Emerging signs point to a more fragmented system of energy flows, with transit through the Strait of Hormuz increasingly shaped by direct bilateral arrangements rather than US-led security guarantees, alongside reports of oil-linked payments being negotiated in yuan.
Taken together, these developments highlight the growing strategic role of energy pricing and settlement and could mark an inflection point in the gradual erosion of petrodollar dominance, potentially paving the way for a parallel “petroyuan” system, the Deutsche Bank strategist argues.
Moreover, as Ms Sachdeva notes, a gradual shift toward domestically produced energy, renewables, and nuclear power could reduce reliance on traded fossil fuels and, with it, the need to hold large dollar reserves. In this scenario, a more self-sufficient global energy system would also likely be less dependent on dollar-based trade and financing.
The current conflict, which follows another major oil and gas shock triggered by the Ukraine war in a decade, may reinforce this trajectory by keeping energy markets structurally tighter, particularly if Gulf infrastructure remains damaged and the weaponisation of shipping routes like the Strait of Hormuz embeds a higher risk premium into global energy trade.
However, several factors could still support dollar dominance. Despite no longer being the largest oil buyer, the US is a major producer and could shape global supply, keeping much of the oil trade dollar-denominated even in a fragmented system where some flows shift to the yuan. Gulf economies also remain deeply tied to dollar-based finance, reinforcing its role. Still, analysts warn the conflict may mark a gradual erosion of the petrodollar and the rise of a “petroyuan”.
Published in Dawn, The Business and Finance Weekly, April 13th, 2026