How the Iran war could speed the decline of the US dollar
The US war with Iran and its soaring debts are reviving talk of the end of the US dollar. Simon Wilson considers if that's really on the cards
Is the US dollar still king?
Yes, the US dollar remains the world's de facto reserve currency and the unrivalled backbone of the global financial system: it accounts for 56% of global foreign-exchange reserves and is involved in 89% of all foreign-exchange market trades worldwide.
Although the US is responsible for less than a tenth of global trade, about 54% of it is still invoiced and settled in US dollars. About 60% of all international loans and deposits are denominated in dollars, as is 70% of international bond issuance. Even physical US banknotes are widely held abroad thanks to the dollar's broad acceptance in almost every country in the world and its perceived utility as a low-risk store of value. Indeed, the Federal Reserve estimates that over half of the more than $2 trillion of US banknotes in issue are currently held by foreigners.
Is that good for America?
Yes. The vast global demand for US dollars translates into an embedded premium for US assets and a discount for its debt – what France's former president Valery Giscard d'Estaing famously dubbed America's “exorbitant privilege”. It also puts the US in a uniquely strong position to damage the financial systems of other countries via the use of punitive sanctions.
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Not everyone agrees that the privilege is all that exorbitant, however. Some US economists, including advisers to Donald Trump, argue that the costs of the US dollar's reserve status outweigh the benefits. It might make borrowing rates lower than otherwise, but (they argue) this discount is overstated, while reserve status also makes the US currency unduly strong, hurting US exporters.
From the rest of the world's perspective, though, controlling the world's most powerful and desired currency does seem like a very nice problem to have.
Why is the US dollar supreme?
The US dollar's strength rests on solid structural foundations: the size and openness of the US economy (accounting for about a quarter of global GDP), the liquidity of its financial markets, the rule of law and powerful network effects that are self-reinforcing. Put simply, says Paul Krugman on Substack, “the most powerful force behind the dollar's dominance is the fact that the dollar is already dominant. The very fact that everyone uses dollars as money makes it easier to use dollars than any other currency.”
The privilege this confers is often overstated, says Krugman, but it is real. Businesses and banks must often use the US banking system, meaning that US officials have the power to observe and, in some cases, block these transactions by, for example, imposing sanctions on adversaries and secondary sanctions on those who trade with them.
Is the US dollar's dominance declining?
Yes. Measured by central-bank reserve holdings, the US dollar's share has fallen from around 71% in 1999 to around 56% today. That's a meaningful shift, driven in large part by the creation of the euro at the turn of the century (it now has a 20% share). But that's scarcely a collapse. The dollar may well become less dominant as a unit of exchange, but it's unlikely to lose its crown as the global reserve currency, argue analysts at Charles Schwab, since there's no real alternative.
A reserve currency needs to be freely convertible and have deep and liquid bond markets to be considered safe for foreign central banks to hold – and there is no other national market that matches the US in terms of size and openness. The euro area's bond markets are far more fragmented. Japan's bond market is closely controlled by its central bank, which owns the bulk of its government debt. China has capital controls, excessive political risk and its currency isn't even freely convertible.
Is the US dollar safe?
It's more that “de-dollarisation” is likely to be gradual rather than imminent. Central banks are already diversifying holdings, buying gold (exceeding 1,000 tonnes annually, the highest in decades) and currencies that come without the geopolitical baggage of today's US (Canadian and Australian dollars, for example).
And there's been a proliferation of bilateral trade arrangements denominated in non-dollar currencies, particularly involving China – including agreements to settle energy trades in yuan, especially among countries (such as Iran) that are subject to, or wary of, US sanctions.
The “weaponisation” of the US dollar to impose sanctions following Russia's invasion of Ukraine gave new impetus to that trend. Yet to date, none of this amounts to a systemic shift. The yuan, despite China's economic heft, still accounts for only around 2% of global reserves. Yuan-denominated trade accounts for less than 4% of the global total; payment systems such as China's Cross-Border Interbank Payment System (CIPS) remain tiny relative to the dollar-based infrastructure centred on Swift.
How is Trump affecting the US dollar?
The turbulence of the second Trump presidency – from the tariff scares to the Iran war and oil shock – has ramped up talk of the US dollar's decline. Trump's unpredictability and apparent disdain for international order and traditional alliances sits uneasily with the dollar's putative role as a global public good.
The dollar slumped in the early months of the second Trump presidency, falling more than 8% in the first four months of 2025 as the world took fright at Trump's tariffs. Yet even from its peak in January 2025 (the start of Trump's current term), the dollar's fall still leaves the US currency near the high end of its 15-year range in trade-weighted terms.
Geopolitical shocks may well encourage hedging and experimentation with alternatives, and chip away at the dollar's aura of neutrality. Equally, economists will continue to worry about the sustainability of US deficits and its gigantic, growing debt pile ($39 trillion, or about 124% of GDP). But none of these factors, in themselves, create a viable successor. The dollar may decline, but there's no sign yet of its fall.
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