I'll be honest. I didn't know what a "petrodollar" was, exactly, until now.
Yes, I knew it related to the connection between oil and the U.S. dollar. But the specifics are now fascinating to ponder; what started as Egypt nationalizing the Suez Canal in 1956 ended with Britain losing the pound as the standard for global oil and trade. By 1974, the U.S. struck a deal with Saudi Arabia that they would price and sell oil exclusively in U.S. dollars.
The "petrodollar"--and the modern global financial system--was born. From then on, countries that wanted to buy oil (as many of the largest economies do) needed to hold dollar reserves. And oil producers who received dollars would often hold them in the form of U.S. Treasuries.
Today, some are drawing parallels between that moment and what's happening in the Strait of Hormuz. Bloomberg reports that Iran has imposed a "toll system" on the Strait, and will only allow ships to pass through this vital waterway if they prove they aren't linked to the U.S. or Israel...and if they pay in Chinese yuan (or crypto stablecoins).
"I think we're going through a big paradigm change in terms of the de-dollarization of global reserves," said Chris Mancini of Gabelli Asset Management on Power Lunch yesterday. It's not just about Iran, either. It goes back to the Russia-Ukraine war, when the U.S. "essentially confiscated" Russia's U.S. Treasury holdings in retaliation for their attack.
That moment, he and others note, put global central banks on alert, and many of them began buying gold. "I think that took gold from around $2,000 to $5,000 an ounce," Mancini told us. "In this new world order, I think there's a good chance that the dollar is not the global reserve."
He still thinks gold will go to $6,000 an ounce, despite its recent pullback as some nations like Turkey have reportedly been selling to support their sliding currency.
The larger question is whether this "de-dollarization" is likely to mean a bigger global financial shift towards gold, the yuan, and/or other major currencies. If so, it's not so much about what it means for the value of the U.S. dollar, but more about how it leaves one less avenue--economic sanctions--for the U.S. to potentially impose when global conflicts arise.
It's also about what it means for U.S. interest rates. At a moment when our debt levels are high, interest payments now rival the defense budget, and the White House has just asked for a 40% increase in that budget, it is essential to retain enough global buyers of our debt.
Or perhaps we'll just have to hold more of it ourselves. As Vahan Janjigian of Greenwich Wealth Manangement told me yesterday, if rates go up much further from here, he'd be looking to buy longer-term U.S. Treasuries.
See you at 1 p.m!
Kelly