Post #3695 by PucksFool on the Macroeconomic Trends and Risks board

Personal Finance Topics / Macroeconomic Trends and Risks

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The article is at the site of European Business Magazine. It looks at Iran's use of the yuan as the basis of what oil it allows through the Strait of Hormuz may be a more damaging weapon against the US than all its missiles.
https://europeanbusinessmagazine.com/business/iran...

Iran is considering allowing a limited number of oil tankers to pass through the Strait of Hormuz on the condition that the cargo is traded in Chinese yuan, a senior Iranian official told CNN. Yenisafak The official described the potential move as part of Tehran’s plan to manage the controlled reopening of the strategic waterway, which has been effectively closed since March 1 following US-Israeli attacks on Iran. Yenisafak

The financial implications deserve more attention than they have so far received.

The Architecture of American Financial Power

To understand why the yuan condition matters, it is necessary to understand what the petrodollar system actually is. Born from the Nixon shock of 1971 and formalised in 1974, the arrangement under which Saudi Arabia and the broader Gulf agreed to denominate all oil sales in US dollars created a self-reinforcing loop that has governed global finance ever since. Because oil — the world’s most traded commodity — must be purchased in dollars, every nation that imports energy must first acquire dollars. Every central bank holds dollar reserves for precisely this reason. The dollar’s status as the world’s primary reserve currency is not an abstract achievement; it flows directly and mechanically from oil.

Global oil is predominantly traded in US dollars, except for sanctioned Russian oil, which is priced in roubles or yuan. Yenisafak Iran’s proposal would extend that exception to the world’s single most critical maritime chokepoint.

As the reserve currency for international trade the US receives huge benefits. Because other countries need dollars, it effectively props up the value of the US dollar. Here's the question:

What would the costs to US business and consumers be if the dollar lost its reserve status?

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