LONDON (Realist English). The US‑Israeli war against Iran, the blockade of the Strait of Hormuz and talk of shifting oil deals into yuan or bitcoin have led many to proclaim the end of the dollar as the world’s reserve currency.
However, Financial Times columnist Brendan Greeley argues in an article published on 25 April that “there is no such thing as the petrodollar” and that dollar dominance depends almost nothing on the outcome of the conflict in the Middle East.
The myth of the “deal of the century”
According to a popular legend, in the early 1970s the United States struck a deal with Saudi Arabia: the kingdom would price its oil exclusively in dollars and invest its dollar revenues in US Treasury bonds, and in return Washington would guarantee the monarchy’s security. Thus the “petrodollar” was born. This system, many believe, is what allows the US to live in debt and finance its deficits.
Greeley reminds us, however, that the word “petrodollar” originally referred simply to the flow of capital from oil sales, not a political deal. When oil prices jumped from $3.6 to $10 a barrel in 1973, exporting countries faced a problem: what to do with their sudden wealth? Their own economies could not absorb such sums.
London, not New York
By 1973, a sophisticated, flexible system of dollar banking outside the United States — the eurodollar — already existed in the City of London. It had emerged spontaneously in the 1950s when European companies preferred to hold dollar deposits and trade them in London rather than exchange them for gold at the official rate.
Eurodollars require no permission from the US Treasury or the Federal Reserve. Any bank anywhere can add a dollar‑denominated liability to its balance sheet. According to Bank for International Settlements data, approximately $14 trillion of offshore dollars (eurodollars) today — nearly 40% of all dollars in the world. No other currency enjoys such a privilege. By comparison, offshore euros amount to just over $3 trillion.
Why the dollar does not depend on Hormuz
The blockade of the strait and the loss of Iranian oil revenues will not topple the global dollar, because demand for the currency is determined by private contracts, not by central bank decisions. According to estimates by Harvard economist Gita Gopinath, nearly a quarter of world trade is invoiced in dollars — by some estimates, more than 50%. Yet only 10% of those goods are destined for the United States. Dollar accounts and loans are created by banks abroad in response to real business needs. That flexibility, not military might, made the dollar a global project for half a century.
The Fed’s backstop is the main trump card
The author stresses that the eurodollar system rests on the implicit guarantee of the Federal Reserve. In times of crisis, the Fed opens currency swap lines with trusted central banks (the UK, Japan, the eurozone), temporarily swapping dollars on its own balance sheet for their euros or yen. Those central banks can then lend dollars to their own commercial banks if their offshore dollars begin to look doubtful.
At the height of the 2008 crisis, the Fed held $554 billion in swaps with other central banks; during the 2020 pandemic, it held $358 billion. No other central bank offers such protection. China has extended swap lines to 40 countries since 2008, but they are untested in a crisis, and the very possibility of a “Chinese threat” acts as a deterrent, Greeley writes.
What if the United States loses?
“The US may be losing power as an empire,” the FT columnist concludes, “but a currency is not the same thing as a country.” America continues to provide a financial umbrella for dollars created abroad. The real threat will arise only when it becomes clear that the Fed is no longer willing to extend its diplomatic generosity through swap lines. For now, the dollar does not “float on carrier groups” but rests on bankers and eurodollars.
