Trump’s Iran war could accelerate the global push against dollar hegemony

Just when everyone had settled on the notion that Trump’s threats to Iran were empty, the United States has sent the world into a state of shock by decapitating the top Iranian leadership. The killing of Ayatollah Ali Khamenei, Iran’s former Supreme Leader, has now set in motion a war that has engulfed multiple countries in a spiral of uncertainty. Even ordinary people in India are suddenly taking interest in oil supply lines, newly discovering how critical the Straits of Hormuz is to the country’s energy security.

The war has sent a wave of chaos through global energy markets, with oil prices having crossed $100 per barrel. This has combined with turbulence in financial markets as well, where concerns regarding investment security are driving a short-term flight to the US dollar as a safe haven. But beneath this temporary trend lies a deeper structural shift away from the dollar, with many already predicting that the Iran war will go down as an event that accelerates the de-dollarisation process despite Trump’s attempts to restore American hegemony in every domain through this conflict.

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De-dollarisation, a term that has gained a great deal of attention in recent years, refers to the trend where countries are reducing their dependence on the dollar to conduct trade, even restricting its use as a medium of exchange and reducing its share in currency reserves. The term, which became part of the global lexicon in the 2000s, has assumed a life of its own in recent decades due to the comparative economic heft gained by China, India and other countries relative to the West.

However, what has contributed most to this trend is American recklessness itself, where the country’s own actions have led to a growing mistrust of dependence on the dollar as the preferred currency. In fact, the 2008 financial crisis was the first brutal jolt to the world regarding how fragile the American economy was and hence how unreasonable the trust in the dollar had become. Thus, despite the United States opening swap lines to select countries, allowing them to exchange their own currencies for dollars to signal its intent to rescue them, the world instead began focusing on the massive leverage that the Americans possessed in the global economy.

Which is why central banks around the world quietly started moving away from the dollar as their preferred reserve currency towards alternatives such as gold, the euro, the Chinese yuan and even smaller non-traditional currencies. It is therefore no surprise that the share of the dollar in global reserves has fallen by about 10 per cent from its 2008 levels, while gold has been the biggest gainer followed by other currencies.

In the last five years, this trend has become even more pronounced, with the biggest example being central banks’ rush to buy gold. Since the outbreak of the Russia-Ukraine war, net purchases of gold have exceeded 1,000 tonnes annually for three consecutive years, a modern record not witnessed for many decades. A big role in this trend has been played by the United States’ willingness to weaponise the dollar through sanctions against Russia. In 2022, when the US and its allies froze $300 billion of Russia’s central bank reserves held in Western jurisdictions, the message was effectively sent to Moscow for its aggression against Kyiv, but it was received by other countries as well. Especially emerging market countries such as China, India, Turkey and others understood from the episode that if it could happen to Russia, it could happen to them as well. Thus triggering a deep-seated mistrust regarding the dollar’s political neutrality.

Since then, gold has been enjoying a multi-year bull market while nations scramble for ways to reduce their dependence on the dollar. In the last few years, intra-BRICS trade has increasingly been conducted in local currencies, partly as a consequence of the West banning Russian banks from using the SWIFT payment messaging system. China and Russia have now switched almost all of their trade to their own respective currencies, the Chinese yuan and Russian rouble, with the dollar and even the euro playing a negligible role.

Even India, which has made record purchases of heavily discounted Russian oil, has used roubles, yuan and even UAE dirhams to settle payments in order to work around American sanctions. Similarly, the BRICS currency may not have taken off, but other more practical measures such as the establishment of swap lines for use during emergencies and making central bank digital currencies interoperable are already in the offing. With a thrust on BRICS expansion, where membership has extended to include countries such as the UAE and Egypt, the momentum towards de-dollarisation could become even stronger in the coming years.

In a world where the dollar was already falling out of favour, the United States’ war on Iran has brought more bad news for it. In the last year alone, the trade-weighted US dollar has lost 6 per cent of its value against a basket of global currencies, and there can be no better commentary on American policies than this. In fact, the Iran war is a symptom of a larger phenomenon plaguing the United States. Every great power has its moment in the sun, but that window eventually closes. Even past great powers were no exception.

However, instead of receding gracefully, the US, especially under the Trump administration, has increasingly weaponised economic integration as a tool to force other countries to fall in line. Just last year, India also became a victim of this behaviour when Trump wielded tariffs against the country to prevent it from buying Russian oil. Although the deeper intent was to secure a favourable trade deal with India, such bullying is not being received well by partners, including us. Even a G7 member like Canada did not take it kindly, as evident in PM Mark Carney’s statement at Davos where he criticised the United States for weaponising economic integration against partner countries. The same behaviour has also been responsible for accelerating the India-EU trade deal.

With the current conflict with Iran, Trump may be seeking to restore American control over the global order, but it is once again likely to do more damage than improve the country’s standing. To be fair, the war has disrupted the yuan-dominated trade between Iran and China, with the latter now looking for alternatives. However, the alternative is still likely to be Russia, and the payments will probably be settled in non-dollar currencies. Similarly, India will continue to buy Russian oil, something which the US itself may quietly appreciate now as it helps keep global prices relatively stable and supply lines running. Thus, nothing takes away from the fact that a declining America has become a source of uncertainty for its partners and allies alike.

The latest example is Spain, which has declined to back the US in strikes on Iran and, not surprisingly, Trump has threatened it with a full trade embargo — another instance of weaponising integration with the American economy. For many decades, the petrodollar system has served as America’s greatest pillar of power, but if the current war prolongs and seriously affects Gulf economies, their own disenchantment with the dollar may grow. The short-to-medium term possibility of this may remain limited, but every dent in US credibility has the potential to grow into a full-blown trust crisis.

America has benefited immensely from the dollar’s hegemony, but first the Russia-Ukraine war, then the Venezuelan regime change, followed by claims over Greenland, and now the Iran war are all testing its dominance. This shows how no form of hegemony has a shelf life that extends to eternity, and the United States is no exception.

(The author is a New Delhi-based commentator on geopolitics and foreign policy. She holds a PhD from the Department of International Relations, South Asian University. She tweets @TrulyMonica. The views expressed in the above piece are personal and solely those of the author. They do not necessarily reflect Firstpost’s views.)