The U.S.-Israel war against Iran has created a defining paradox for the global financial system. While the conflict has accelerated long-term de-dollarisation trends, it has simultaneously triggered a short-term surge in demand for the U.S. dollar. Analysts describe this as a "bumpy ride": the dollar's dominance is being gradually eroded, yet its status as the world's primary safe-haven remains intact.
When the Israel-U.S. war against Iran broke out, investors rushed into USD-denominated assets in a classic "flight to quality." The dollar index rose nearly 2% in the weeks following the initial strikes, despite having declined 9.4% over the course of 2025. Unlike past conflicts, the U.S. is now the world's top producer of oil, gas, and weapons.
This transformation insulates its economy from energy shocks that weaken major importers such as Japan, India, and the European Union. Higher oil prices now improve the U.S. trade balance rather than draining it. Yet this resilience masks profound structural strain. The mechanisms that have sustained dollar dominance for decades—particularly the petrodollar system—are under unprecedented pressure.
Iran has directly targeted the financial architecture of U.S. energy dominance. The country has reportedly demanded that vessels passing through the Strait of Hormuz—a chokepoint for 20% of global oil—settle transit fees in Chinese yuan or cryptocurrency rather than dollars. If major importers like Japan or India are forced to hold yuan to purchase Gulf oil, global demand for the dollar would diminish significantly.
The erosion extends beyond Iran. The 1974 U.S.-Saudi security and economic framework, which expired on 9 June 2024, was not formally renewed. This has enabled a seismic shift in Gulf financial policy. Saudi Arabia is now officially open to selling oil in yuan, euros, and yen, and has joined the mBridge project to facilitate cross-border digital currency payments outside Western banking systems.
Russia and China are reportedly coordinating with Riyadh to settle energy trades in national currencies, specifically targeting the yuan to break the dollar's monopoly on hydrocarbons.
The United Arab Emirates has similarly pivoted. Emirati officials have warned that war-related disruptions to dollar-denominated revenue may force them to use the yuan for oil sales. United Arab Emirates Central Bank Governor Khaled Mohamed Balama recently met with United States Treasury Secretary Scott Bessent to discuss establishing a currency-swap line—a pre-emptive "dollar lifeline" to protect the dirham's peg.
Meanwhile, Saudi Arabia has begun deploying dollar reserves to support allies, transferring a 1 billion United States dollar deposit to Pakistan's central bank in April 2026 as part of a broader 3 billion United States dollar package.
The war may ultimately be remembered as the catalyst that accelerated the end of petrodollar dominance—but the dollar's final chapter will be one of gradual erosion rather than sudden death
If major producers successfully move even 20% of global oil trade into non-dollar currencies, the petrodollar era could reach a symbolic end. Deutsche Bank analysts have characterised the conflict as a "perfect storm" for the petrodollar regime, noting a potential permanent shift towards a "petroyuan" system for Gulf settlements.
Beyond the energy nexus, the dollar's share of global foreign exchange reserves has fallen to approximately 56–57%, down from over 70% in 2000 and 71% in 1999. Nations, including India and Indonesia, have officially agreed to use national currencies for cross-border trade. Pakistan has fast-tracked currency swap agreements with the European Union, Association of Southeast Asian Nations, Russia, and Iran to reduce dollar dependence for essential imports.
The BRICS bloc is actively constructing an alternative financial ecosystem. BRICS Pay, a blockchain-based system set to launch pilot programmes in 2026, aims to link national payment systems such as India's Unified Payments Interface and China's Cross-Border Interbank Payment System, enabling direct cross-border trade that bypasses the dollar-centric Society for Worldwide Interbank Financial Telecommunication network. Several members have also joined the mBridge digital currency platform for instant, multi-currency wholesale settlements.
Bilateral de-dollarisation is advancing rapidly. As of April 2026, approximately 95–99% of trade between Russia and China is settled in their national currencies, effectively eliminating the dollar from their commerce. India recently settled its first major crude oil transaction with the United Arab Emirates in rupees.
To anchor their monetary independence in tangible assets rather than United States debt, BRICS central banks purchased 166 tonnes of gold in the second quarter of 2025 alone—one of the largest quarterly acquisitions in recent history.
These trends unfold against a backdrop of acute fiscal stress in Washington. The United States national debt has surpassed 39 trillion United States dollars, with annual interest payments exceeding 1 trillion United States dollars. Economists, including Jeffrey Sachs, have warned that ballooning deficits—compounded by trade wars and high interest rates—pose the primary internal risk to the dollar's stability.
Since the war began, foreign central banks have sold over 80 billion United States dollars in United States Treasuries to defend their own currencies against rising oil prices.
Despite these pressures, most experts from institutions including J.P. Morgan, Morgan Stanley, Chatham House, and the International Monetary Fund do not anticipate a sudden dollar collapse. The currency retains formidable structural advantages. It is involved in roughly 89% of all foreign exchange transactions and remains the primary vehicle for approximately 85% of global trade settlements. Over 14 trillion United States dollars in dollar-denominated credit is held outside the United States, making a rapid shift prohibitively disruptive for the global banking system.
The dollar's "tail-risk utility" persists: when global crises erupt, investors still flock to USD assets. During periods of diplomatic pause, when hopes of a ceasefire emerge, the dollar has softened as capital rotates back into riskier assets—a pattern that underscores its continued role as the global benchmark.
Analysts predict a "tale of two halves" for 2026: the United States Dollar Index may dip towards 94.00 by mid-year if the Federal Reserve cuts rates, before rebounding towards 100.00 by year-end as fiscal stimulus and tariffs take effect.
Cryptocurrencies have played a mixed role in this environment. Bitcoin and Ethereum initially dropped 5–15% when the war began as investors fled to cash. By mid-April 2026, however, Bitcoin had risen 12% amid peak tensions, even as gold fell 10%, suggesting that some investors view it as a "politically neutral" alternative. Iran has begun accepting cryptocurrency for military contracts to bypass sanctions, illustrating its emergence as a geopolitical tool.
The evidence points not to an imminent collapse, but to a "phased decoupling." The dollar is shifting from absolute hegemony to "first among equals" in an increasingly multipolar financial order. Its share of global reserves is at a 30-year low, alternative payment systems are proliferating, and major oil producers are actively diversifying their settlement currencies.
Yet the global economy remains too deeply anchored in dollar-denominated assets for a sudden unravelling. A precipitous collapse would trigger a global depression that neither China nor the BRICS nations currently desire. Instead, 2026 is emerging as a transitional year: the "age of unquestioned dollar dominance" is ending, replaced by a fragmented system in which the dollar loses its monopoly but retains its privilege.
The war may ultimately be remembered as the catalyst that accelerated the end of petrodollar dominance—but the dollar's final chapter will be one of gradual erosion rather than sudden death.