Dollar vs yuan: Could a battle for the control of Hormuz spark a petro-currency war?

As reports emerged last week on which ships Iran had let through the Strait of Hormuz, India-bound carriers of LPG among them, one group was no surprise: vessels carrying Iranian crude exports. By data analytics firm Kpler’s estimate, Iran’s oil shipments kept up an average daily pace of 1.3-1.4 million barrels in March amid hostilities with the US and Israel. Most of it was headed for China, reportedly, bought by small refiners paying in Chinese yuan.

In contrast, the Gulf states that sell the world’s most valuable traded commodity in dollars have found their oil trapped. For decades, a ‘currency war’ has meant a game of mutual devaluation to cheapen exports for a trade edge. Is Hormuz a flashpoint that could spark off a new kind—a petro-currency war? As the world’s dominant exporter, the People’s Republic has converted about half its trade into yuan.

As gatekeeper of the world’s most cheaply extracted oil, the Islamic Republic followed last week’s strikes at oil and gas facilities across the Gulf with a glower at the US alignment of regional monarchies, urging a rethink. Oil trade in dollars has long helped anchor the greenback’s global liquidity, even after the US quit redeeming it for gold. Since the Iran war began, the dollar has reversed its tariff-led slide, thanks to a jump in demand for dollars as crude, gas and other imports got costlier for importers.

Its dominance of trade payments underpins the US role as the global issuer of reserve money. This may have kept the dollar too strong for US industrial competitiveness, but it also grants America a privilege. It can stretch its fiscal deficit and pile up debt easily, since it gets to borrow cheaply from countries that buy its bonds or export capital to it in