Central Banks Sell U.S. Treasury Bonds During Iran War

Foreign central banks have sold some of their U.S. treasury bonds in the four weeks since the U.S. and Israel began their military campaign against Iran. According to the Federal Reserve Bank of New York, the amount of U.S. treasuries it held in custody for foreign governments and central banks has dropped by $82 billion since February 25 to a 14-year low of $2.7 trillion.

This drop shows how Iran’s attacks on civilian cargo ships in the Strait of Hormuz and the resulting rise in oil prices have damaged the economies of several countries. Higher oil costs have also made the U.S. dollar stronger, another incentive for countries to sell treasuries to get cash or support their own currencies.

Crucial rate: These sales have helped push two-year and 10-year U.S. treasuries up to their highest interest rates since 2024, which means that it costs the U.S. government more to borrow money.

$40,000,000,000,000: This is a growing problem for the U.S. government. With the national debt now at nearly $40 trillion, the federal government already spends roughly one fifth of all the money it collects in taxes just on debt interest payments, and higher rates on treasuries only exacerbate the problem.

Much of the dollar’s value derives from the fact that most international oil sales are priced in U.S. dollars. This means that governments and businesses around the globe must hold large amounts of dollars to buy oil, which keeps demand for the dollar high.

This “petrodollar” system has been in place for more than 50 years.

After President Richard Nixon ended the dollar’s last remaining link to gold in 1971, his administration convinced leading oil-producer Saudi Arabia to price and sell its oil in U.S. dollars and invest the extra money in U.S. treasuries and other assets, in return for U.S. military protection. Other major oil exporters soon followed, creating a system that has supported strong demand for the dollar ever since.

Now, White House aides are reporting that since a mission to pry open Hormuz would push the conflict beyond President Trump’s timeline of four to six weeks, he’s willing to end the U.S. military campaign against Iran even if the Strait of Hormuz remains largely closed.

Economic sea change? Such statements have thrown U.S. security guarantees into question. This could accelerate efforts by other countries to move away from dollar-based oil trade, which would weaken one of the dollar’s main supports.

The late Herbert W. Armstrong believed a major financial crisis in America would serve as a catalyst for the nations of Europe to unite into a pan-European superpower. In a July 22, 1984, letter, he warned that a massive banking crisis in America “could suddenly result in triggering European nations to unite as a new world power larger than either the Soviet Union or the U.S.”

Events in the Middle East and the resulting financial pressures are raising fresh questions about the stability of the global financial system in general and the future of the U.S. dollar in particular.