UniCredit: Iran War and USD - FJElite
The Iran conflict is straining the petrodollar system, raising concerns that petroyuan may prompt a shift away from the USD. Trade patterns and the liquidity of US financial markets still point to a gradual fall in the USD’s dominance, rather than an abrupt breakdown. Being the issuer of the world’s reference unit appears to be neither Beijing’s intention nor in its interest.
- Despite the interim agreement reached between the US and Iran, the Strait of Hormuz crisis may challenge the petrodollar system and strengthen the RMB’s role as a currency of denomination for oil transactions Nonetheless, we do not expect an outright collapse, but rather a gradual shift towards a more fragmented and multipolar monetary system in the long run.
- While the international role of the yuan is increasing, and more in its digital form than as a petroyuan alone, China lacks the deep and liquid financial markets needed to pose a credible threat to USD dominance. Invoicing oil purchases in RMB is not enough to dethrone the USD, although China’s role asthe world’s largest energy buyer is leading oil producers to focus increasingly on Chinese rather than US demand.
- The comparison with the 1956 Suez Crisis, which accelerated the decline of sterling as the leading reserve currency, is tempting. But the USD’s rise to global monetary dominance was already evident before Suez, and Beijing itself may have little interest in the RMB becoming the world’s leading reserve unit.