The Iran War won’t kill dollar dominance. But Washington might.

Even if the framework agreement to end the U.S.-Israel-Iran War is successful, economic fallout from the conflict will persist at least through the end of the year. And the consequences for the global economic system — particularly the centrality of the U.S. dollar and its dominance of the oil trade — may be more far reaching.

Analysts have suggested that the war may spell the end of the so-called petrodollar, or alternatively that it could bring about an era of renewed dollar dominance, or that really, the petrodollar ceased to be a meaningful driver of U.S. monetary hegemony decades ago.

The latter vein of analysis is largely correct.

Under the petrodollar system, oil is priced in USD, and the vast majority of oil transactions — 80% as of 2025 — are invoiced in dollars. This is said to have originated in 1974 with a U.S.-Saudi deal: the Saudis would price their oil exports in dollars and recycle their earnings into dollar-denominated assets, and the U.S. would guarantee security in the Gulf.

While this informal arrangement was real, its importance has been overplayed. The dollar already dominated the oil trade for decades prior to 1974, owing to its broader role as the currency of global trade and foreign reserves, as established at Bretton Woods. And crucially, the Saudis and other OPEC producers had little choice but to recycle their earnings into dollar assets, as only dollar markets had sufficient scale and liquidity to absorb these inflows.

Petrodollar recycling — whereby major oil-producing states invested their dollar-denominated oil revenues abroad — certainly helped smooth the transition in the global dollar system from the gold standard era to one of fiat money and floating exchange rates, and petrodollars provided a crucial source of demand for dollar assets for decades after. But the significance of the petrodollar has been diminishing for quite some time.

IMF analysis shows that in the 1970s, almost half of oil export revenues ended up as deposits in Western banks. By the period from 2018 to 2023, this share may have fallen to the single digits. Instead of channeling most export earnings into Western banks and U.S. Treasuries, Gulf states direct these revenues into massive sovereign wealth funds that primarily invest in domestic projects.

Meanwhile, export surpluses and dollar accumulation by East Asian manufacturing economies have come to dwarf those of the Gulf states, making the former a more significant source of global dollar liquidity.

What today’s petrodollar-centric analyses miss is that the oil trade has only ever been one pillar of the complex and ever-evolving system that is the global dollar order. The best known pillar of this order is the dollar’s role as global reserve currency, owing to its stability, liquidity, and strong institutional backing. Its share of reserves stands at around 58% today.

Even more important is the dollar’s dominant role in markets through cross-border invoicing and debt. Beyond oil alone, the dollar is used in more than 50% of global trade transactions. Around half of all cross-border bank loans and international debt securities issuances — corporate and sovereign bonds — are also denominated in dollars.

This activity is supported by a massive offshore dollar banking system in which non-U.S. banks create trillions of new dollars through lending activity. These offshore dollars have been effectively backed during global financial crises by Federal Reserve swap lines with foreign central banks.

As analysts like Karthik Sankaran and Brendan Greeley have ably demonstrated, it is primarily this activity that sustains dollar centrality, rather than the allocation of public reserve holdings or the oil invoicing of Gulf states. And recent data shows that offshore dollar liabilities have only grown over the last decade.

This is why the Iran war will have limited impact on dollar centrality. Many countries may lose faith in U.S. security backing and chafe at American recklessness. Sanctioned countries will continue to find alternative channels for trade invoicing and borrowing that drive marginal movement away from the dollar. But for the majority of global transactions, there is still no economically competitive alternative to the greenback.

Yet the dollar system carries significant costs for many of its participants, particularly in the developing world. In the context of the Iran war, its effects are stark. The war caused fossil fuel prices to skyrocket, and now that the United States is a net exporter of hydrocarbons, this drives the value of the dollar upward. For countries that depend on fossil fuel imports paid for in dollars, surging oil prices are amplified to devastating effect.

Across South and Southeast Asia, which are heavily dependent on Middle Eastern oil, this has led to fuel rationing, austerity measures, and campaigns to cut imports. Central banks across the region have drawn down foreign reserves to stave off more drastic depreciation.

These perverse consequences of dollar centrality are nothing new. During the so-called Volcker Shock of the 1980s, dramatic U.S. interest rate hikes led to soaring debt servicing costs for developing countries, helping produce a decade of economic recession and stagnation.

On their own, developing countries have little power to change or escape from the dollar system. And notwithstanding Saudi willingness to experiment with selling some oil in yuan, oil producers have scant incentive to move away from the dollar unless they are forced to do so by sanctions.

The two currency issuers with the heft to challenge the dollar are the European Union and China. The euro benefits from the backing of a strong central bank, full convertibility, and large and liquid capital markets, but suffers from fragmentation and coordination problems among EU members.

Renminbi internationalization is held back by capital controls and illiquid markets. China has seen some success in creating alternative channels for renminbi payments, and now settles around 30 percent of its trade in its own currency, though renminbi shares of total global trade transactions and currency reserves remain small.

As it stands, neither currency is likely to overtake the dollar’s global role; rather, both will make up growing shares of reserves and payments while the dollar retains a plurality across these functions.

The Trump administration, for its part, believes that the dollar system places an intolerable burden on the United States by creating extra demand for dollars, driving up the currency’s value and reducing the competitiveness of US exports. Their tariffs strategy has been haphazardly aimed at reducing the costs of dollar hegemony while preserving its benefits — cheaper borrowing and extraordinary sanctions power.

This maneuver is part of the Trump administration’s broader attempt to replace a strategy of hegemony with one of domination. This is a poor trade. Hegemony operates through the promulgation of rules and institutions, and the cooptation of other powerful systemic actors through mutually beneficial arrangements. Hegemony is the ability to quarantine an entire nation’s banking system with the simple issuance of a rule from the Treasury Department. Domination operates through obtrusive displays of force and coercion.

It is the ability to murder an adversary’s top leadership in a precision strike and still end up losing a war.

So far, the Trump administration’s blunders have been insufficient to end dollar centrality. But if the dollar system is to unravel quickly, the damage will have to be dealt from within. Attacks on the independence and credibility of the Fed could undermine the provision of crucial dollar swap lines in the next global crisis. Amid the administration’s tax cuts and enormous demands for new military spending, U.S. deficits have reached unprecedented levels for a period of economic growth, which could erode confidence in U.S. Treasuries, the bedrock of the deep and liquid financial markets that make the dollar so desirable.

Contra Deutsche Bank, the Iran war is not a “perfect storm” for the dollar. But it is representative of the growing recklessness and unilateralism that is undermining the trust, institutions, macroeconomic strengths, and well-functioning financial pipelines on which the dollar system is built. The storm has yet to arrive, but the clouds are gathering.