De-dollarisation: The beginning of the end of American hegemony

Dedollarisation refers to the reduction of dependence on the US dollar as a medium of international trade, a reserve currency, and a unit of account. The US dollar is the mirror image of US hegemony. Economic dominance and geopolitics reinforce each other. The US leverages this to exercise its hegemony. The disconnection between the two leads to the collapse of US hegemony.

The US issues the primary reserve currency. This is the US’s unique advantage. It is called the Exorbitant Privilege. The dollar’s status as a global reserve currency grants the US this privilege. The US dollar has been enjoying a dominant position as a global reserve currency since 1944. Foreign countries possess significant quantities that make them a significant asset for international trade, exchange, investment, and domestic economic stability. To secure reserve status, the currency must have global acceptance, especially in international trade invoicing and the pricing of global commodities. It has high liquidity value and is easily convertible. The US’s political stability, large economy, and Treasury markets qualified it for dollar hegemony. The US dollar’s global market share today is around 56.77 per cent, down from 70 per cent in 2000.

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When did the dollar become hegemonic?

The dollar’s hegemony was gradual and spread across the twentieth century. There are three critical stages that led to the rise of the dollar and its exercise of hegemony. The British pound was the global primary reserve currency until the end of the First World War, though the US had surpassed Britain’s economy by the 1870s. Britain’s debt rose in the aftermath of the First World War. The US seized the opportunity and recorded the highest global gold inflow.

The US began to register its global importance, and the UK started to dwindle. The mid-1920s marked the strengthening of the dollar, which surpassed sterling to become the leading global reserve currency. The interwar period between 1918 and 1939 witnessed competition between the dollar and the pound for global dominance. However, the dollar weakened in 1933 because of the Great Depression. President Franklin D. Roosevelt devalued it to regain economic strength after the Great Depression. It stimulated the US economy.

The Bretton Woods Conference marked the irreversible rise of the dollar in 1944. The Allied nations synced their currencies with the dollar and strengthened it. The International Monetary Fund (IMF) and the World Bank were established in the dollar-centric order. The US controlled roughly two-thirds of the world’s gold reserves by 1945. The “Nixon Shock” of 1971 and President Nixon’s stand on dollar-gold non-convertibility affected the dollar’s dominance. The 1974 agreement with Saudi Arabia regained the dollar’s strength.

The petrodollar accord revitalised the US dollar. OPEC agreed to trade and price oil in US dollars. The increasing global demand for oil since the 1970s has made it mandatory for countries to hold dollars to buy oil. It was the only currency required for oil transactions — the buying and selling of oil. Since oil became a vital commodity, countries have been forced to reserve dollars to buy fossil fuels. It therefore re-anchored the dollar’s hegemony. Gold was completely replaced by the dollar.

Suez and the fall of the pound

The Suez Crisis of 1956 is often cited as one of the key causes of the fall of the British pound. The canal was the main route for transporting oil. The canal’s closure hindered oil flow. The Suez Crisis of 1956 refers to Egyptian President Gamal Abdel Nasser’s nationalisation of the canal. It became an international conflict. It marked the fall of British and French imperial power and the decline of the pound as a global currency. This fall also witnessed the rise of the US and the Soviet Union. The withdrawal of the US and UK from the Aswan High Dam provided the much-needed trigger to impose tolls on ships transiting through the canal. The toll collected was used in the Aswan High Dam project.

The matter did not stop there. Nasser nationalised the Suez Canal Company. Suez was the lifeline and a critical passage for oil shipments and global influence. The Suez closure marked the endgame for the pound and its replacement by the dollar. The Protocol of Sèvres and the alliance between Britain, France, and Israel succumbed to US pressure and the Soviet threat. The British withdrawal from the conflict coincided with the resignation of Prime Minister Anthony Eden.

Britain lost its superpower status, and the pound weakened. Reserves were depleted. The UK lost its financial leverage. Investors sold their sterling, fearing its extreme devaluation. War debt from the Second World War and defence spending had strained sterling. The Suez crisis did the rest to irreparably weaken the pound. Thereafter, Britain depended on US finance and military operations. Finally, the International Monetary Fund (IMF) gave a $1.3 billion rescue package to help Britain recover from complete collapse.

Hormuz and the possible fall of the dollar

Will the history of Suez repeat in Hormuz? The Islamic Revolutionary Guard Corps (IRGC) controls Hormuz and chooses asymmetric methods to prevent the US from declaring victory over Iran. Hormuz is a critical shipping passage. It is an energy choke point. It transits approximately 20 million barrels of oil and 11.4 billion cubic feet of natural gas every day. China is the major buyer of Iranian oil, paying in its own currency rather than the petrodollar. Iran has been transacting with China using Chinese yuan. The yuan has become a corridor currency. China is the second-largest global economy. It pushes the yuan to strengthen the exercise of its global hegemony. China is an energy-dependent economy.

Currently, it buys cheap crude oil from Iran in yuan. The US cannot weaponise the petrodollar in the Iran war. Iran reportedly meets its defence requirements by purchasing from China, paying in yuan. Ground operations in Iran are difficult. Casualties are bound to occur. It will have political consequences back home in the US. It will impact the political calculus. If the US stops Chinese ships carrying oil from Iran, it might lead to a US-China confrontation. The toll Iran reportedly charges ships passing through the Strait of Hormuz is not in dollars, but in Chinese yuan or cryptocurrency. US dollars are not required to settle oil transactions. Therefore, the dollar cannot be used as a soft weapon against Iran.

The dollar hegemony may not decline dramatically. But Hormuz will harm the dollar’s dominance. The financial world will become more multipolar. The petrodollar will erode gradually. China, as a competing power with its economy, purchasing power, and energy needs, will open the way for an alternative system. The Iran–China financial deal and transactions, free of the dollar, mark an alternative to the dollar ecosystem.

The Hormuz crisis is a black swan moment that will present countries with alternatives and strategic autonomy to decouple from the US sphere of influence and dollar weaponisation. It is a little early to predict a decline in the US dollar, but the Hormuz crisis may accelerate it. Over the last decade, the US dollar has been experiencing volatility. The US dollar declined by 10 per cent in 2025. Though it maintains its transactional dominance, its global reserves are declining. Trump’s past trade tariffs and the Iran war have impacted the dollar’s hegemony. The US’s increasing debt and pressure on the Federal Reserve have been affecting investors’ confidence.

Why is dedollarisation possible?

The dollar protects the US’s network effect. The US’s belligerent geopolitics has ensured the slow decline of its network effect. The dollar has been a significant foreign policy tool for the US since the end of the Second World War. The US used the dollar to impose sanctions. It gave the confidence that dollar assets are risk-free. Alignment with Washington is risk-free. This perception had its time and is currently undergoing change. China, Russia, and other countries are trying to decouple from the US’s coercive financial power and jurisdiction.

Technological innovation and alternative payment methods have emerged today. They are alternatives to the dollar-based Society for Worldwide Interbank Financial Telecommunication (SWIFT) system. Blockchain-based settlement and Central Bank Digital Currencies (CBDCs) are digital infrastructures that serve as alternatives to the New York-controlled SWIFT system. They offer instant cross-border money transfers. India’s Unified Payments Interface (UPI) and its ease of transactions are gaining popularity in the GCC countries. China’s Cross-border Interbank Payment System (CIPS) and Russia’s System for Transfer of Financial Messages (SPFS) are clearing systems that allow trade without depending on the Western network.

The BRICS+ bloc is a counterweight to the Western-led G7. The 11-member countries account for approximately 37.3 per cent of global GDP. The founding members are Brazil, Russia, India, China, and South Africa. The countries that later joined are Egypt, Ethiopia, Iran, the United Arab Emirates (UAE), and Indonesia. The partner countries are Belarus, Bolivia, Cuba, Kazakhstan, Malaysia, Nigeria, Thailand, Uganda, Uzbekistan, and Vietnam. Financial autonomy is one of the objectives of the BRICS+ bloc.

Trade in local currencies and dedollarisation are its main goals. Iran-China trade is conducted in yuan. India-Russia trade also takes place in national currencies. Decoupling from the dollar has begun. Financial hierarchies have been affected. Non-dollar oil and gas contracts in yuan and rupees mark the growing influence of the BRICS+ bloc.

Financial vulnerability in the US economy, driven by budget deficits and federal debt, has changed perceptions of US Treasuries and their resilience. Central banks currently adopt the policy of acquiring gold as a neutral, “sanctions-resistant” alternative.

Given the US economy’s increasing vulnerability, the Hormuz crisis may irreparably harm it. If Vietnam repeats in Iran, the US will face both domestic and international difficulties. The Vietnamese victory depended on asymmetric warfare. The IRGC toes the same line to make history repeat. Today, the US cannot sustain a long war. Its economy will not permit a prolonged war.

If the US tries to disconnect the financial support Iran gets from China for selling oil, it will have to stop Chinese oil vessels coming from Iran from passing through the Strait of Hormuz. This will lead the US into a confrontation with China. It will be counterintuitive for the US to open a multi-front war. The Russia-Ukraine war is inconclusive. The US-Iran conflict does not seem to end anytime soon. If the US does not stop China from buying oil, the IRGC may extend the war beyond a conceivable timeframe. It may mark the beginning of the end of US hegemony. Dedollarisation will be an inevitable corollary. Multipolarity will replace the US’s unipolar order.

(Jajati K. Pattnaik is a Professor at the Centre for West Asian Studies, School of International Studies, Jawaharlal Nehru University, New Delhi. Chandan Panda is a Professor at the Central University of Karnataka, Karnataka. Views expressed in the above piece are personal and solely those of the authors. They do not necessarily reflect Firstpost’s views.)