US-Iran War Impact: Shift from Dollar in Global Energy Trade
The outbreak of the Iran war has strengthened the dollar due to a global flight to safety and rising energy prices, but mid-term risks loom for Washington. Major energy importers like China and India are increasingly trading oil and LNG in yuan and rupees, avoiding the dollar. China's energy trade with Iran is conducted largely in a closed system, securing energy supply amidst U.S. sanctions. The U.S. Treasury faces challenges as foreign holdings in Treasury bonds decrease, and inflationary pressures rise due to escalating energy costs.
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The Iran war has led to a strengthening of the dollar initially, but significant mid-term risks are emerging for the U.S. as China and India increasingly transact in yuan and rupees for oil and LNG purchases. China is now the largest buyer of Iranian oil, with approximately 80% of transactions conducted outside the U.S. banking system.
The closure of the Strait of Hormuz has halted a fifth of global oil and LNG shipments. As a result, the era of trading oil for U.S. Treasury bonds is diminishing, with foreign holdings dropping to below $700 billion.
Rising inflation and new defense spending plans are expected to increase U.S. borrowing costs, with the yield on 10-year Treasury bonds rising to 4.22%. Simultaneously, the BRICS nations are likely to advance a decentralized payment protocol, further challenging the dollar's dominance.
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