In the wake of joint military actions by the United States and Israel against Iran on February 28, 2026, significant volatility has been observed in international oil, U.S. dollar, and gold markets. Typically, geopolitical conflicts trigger a sharp rise in market risk aversion, which tends to push gold prices higher. However, unusually, since the outbreak of the U.S.-Israel-Iran military conflict, gold prices have declined, while oil and the U.S. dollar have strengthened.
More notably, the conflict has served as a turning point, reversing the previous trends of both gold and the U.S. dollar. From February 27 to March 16, 2026, the spot price of London gold and the settlement price of COMEX gold futures (active contracts) fell by 4.36% and 4.68%, respectively. In contrast, the U.S. dollar index rose by 2.21% during the same period. By comparison, from the beginning of the year until the outbreak of the conflict (December 30, 2025, to February 27, 2026), London gold spot prices and COMEX gold futures settlement prices (active contracts) had increased by 19.56% and 19.64%, respectively, while the dollar index had fallen by 0.58%. This indicates a clear reversal in the trends of international gold and the dollar index before and after the conflict.
So, what has caused the decline in gold, a traditional safe-haven asset, during a period of geopolitical conflict? Has the petrodollar made a comeback? And how does the petrodollar influence gold price movements?
First, the primary reason for gold's weakness since the conflict began is the market's perception of a significant disparity in military strength between the involved parties. This has led to expectations that the conflict's outcome holds little uncertainty, thereby failing to provide strong support for gold as a safe-haven asset.
Second, the instability in the Middle East, a key region for international oil, following the conflict has accelerated the rise in crude oil prices and heightened expectations of "stagflation." The conflict has caused disruptions or sporadic interruptions to shipping through the Strait of Hormuz, a critical chokepoint for oil transport. This has nearly halted the daily transport and supply of approximately 15 million barrels of oil and 4.5 million barrels of refined products from the Gulf region, exacerbating global oil supply-demand imbalances and further fueling expectations of rising crude prices. Concerns are growing about a recurrence of the stagflation seen during the 1970s Gulf War. Rising oil-driven inflation has, in turn, reduced expectations for interest rate cuts by the U.S. Federal Reserve. The cooling of rate cut expectations may lead to tighter U.S. dollar liquidity, pushing the dollar index higher.
Third, approximately 80% of global oil trade is settled in U.S. dollars, with the remaining 20% settled in non-dollar currencies such as the euro, renminbi, and yen. Therefore, the sharp increase in crude oil prices resulting from the U.S.-Israel-Iran conflict has objectively contributed to the rise in the U.S. dollar index, indicating a temporary return of the "petrodollar." In 1971, President Nixon decoupled the U.S. dollar from gold, leading to the collapse of the Bretton Woods system. Subsequently, the United States reached an agreement with Saudi Arabia, offering military protection in exchange for Saudi Arabia's commitment to price its oil exports in dollars. Oil trade surplus countries then reinvested their "petrodollar" earnings into dollar-denominated assets, creating a closed loop between oil and the dollar.
The three pillars of the petrodollar are: first, the military dominance of the United States and its security agreements with oil-exporting nations; second, the continued use of the U.S. dollar as the primary pricing and settlement currency in the international crude oil market; and third, the prevailing reliance on oil and related petrochemical energy as the main energy supply sources. Currently, these pillars are showing signs of weakening, driven by the rise of "carbon neutrality" and the growth of new energy sources. The share of non-dollar currency settlements in the international crude market has increased. For instance, on March 8, 2026, Saudi Arabia's Energy Ministry announced that the proportion of oil settlements in renminbi had risen from 25% to 41%, while two major Saudi state-owned banks officially joined China's Cross-Border Interbank Payment System (CIPS). However, when market focus shifts back to oil supply-demand tensions, the petrodollar is likely to reemerge. Notably, many Middle Eastern countries, such as Saudi Arabia, Qatar, and Bahrain, still maintain dollar-linked exchange rate regimes, which objectively support the petrodollar. Furthermore, the massive scale of Middle Eastern sovereign wealth funds, heavily invested in dollar assets, makes a swift decoupling from the petrodollar difficult in the short term.
The future of the petrodollar, in the short term, depends largely on whether international oil supply and demand return to normal. In the medium term, it hinges on the alleviation of geopolitical risks in the Middle East. Long-term prospects are tied to whether a solution can be found for the "Triffin dilemma."
First, the oil supply chain is significantly affected by the Strait of Hormuz, with about 20% of global oil supply reliant on this passage. This necessitates increased releases from strategic petroleum reserves by various countries. If obstacles in the oil supply chain are effectively removed, oil and dollar prices are likely to decline again. As the situation in the Middle East stabilizes, the international gold market may also see a downturn. Second, global distrust in the credibility of the U.S. dollar and dollar-denominated reserve assets has reached historically high levels. This sustained lack of confidence in dollar assets is expected to continue supporting gold prices. Third, the rise in crude oil prices and related expectations are anticipated to influence the Federal Reserve's interest rate cutting cycle. With heightened stagflation concerns and the dual challenges of persistent high inflation and relatively weak employment in the U.S., the Fed faces significant obstacles to cutting rates, which could somewhat benefit the dollar and weigh on gold. Finally, in the long run, the share of fossil fuels in the global energy mix is set to decline further. Rising international oil prices may benefit alternatives, such as green and clean energy sources like solar and photovoltaic power, potentially boosting stocks and bonds related to the "carbon neutrality" theme.
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