Joseph Daniel O’Neil

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What is the petrodollar system and how does it impact forex markets?

After the 1970s oil shocks, the U.S. struck deals with OPEC nations to price oil exclusively in U.S. dollars. This “petrodollar” system entrenched global demand for USD, as countries needed dollars to purchase oil. Consequences: USD became the world’s primary reserve currency, strengthening its dominance in forex markets. Benefits for the U.S.: ability to finance deficits cheaply. Risks: global dependency on USD makes the system vulnerable to geopolitics. For traders, petrodollar flows explain persistent USD demand, particularly during oil price booms. Retail traders can monitor oil trends and Middle Eastern capital flows for indirect USD signals. The petrodollar illustrates how commodities and geopolitics shape currency power.