The conventional narrative around the Iran war and global finance is by now familiar: the conflict is accelerating de-dollarisation, strengthening China’s petroyuan, and hastening the end of American financial dominance. That narrative is not wrong. But it misses the more consequential shift.

The real story is not replacement, but degradation — the slow weakening of the dollar’s authority without any viable alternative to take its place. A system that is increasingly distrusted, selectively bypassed, yet still unavoidable, is more unstable than one defined either by clear dominance or by orderly transition.

A natural objection follows. If American power is declining, its arsenals draining, its allies hedging, its credibility under strain, then something must be replacing it. And if nothing can replace the dollar, how can that decline be real? The contradiction dissolves once we distinguish between two forms of power that erode at different speeds: military-political influence and monetary-financial dominance.

American military primacy is declining in relative terms. It is stretched across multiple theatres, its resources finite, its adversaries probing its limits, and its allies quietly recalibrating their dependence. That argument holds. But monetary power is structurally more resilient. It rests not on battlefield success but on network effects, institutional depth, legal infrastructure, and, most critically, the absence of credible alternatives.

History offers a clear parallel. Britain’s geopolitical decline began after the First World War, yet sterling remained a major reserve currency well into the 1950s. Empires recede faster than currencies. The delay is not incidental; it is structural.

This delay produces the most unstable configuration: a weakening enforcer of an indispensable system. The dollar persists not because confidence is intact, but because exit is prohibitively costly. Dependence remains; trust erodes.

The immediate dynamics of the war illustrate this paradox. In the short term, the dollar has strengthened. Brent crude surged towards $100 per barrel as Gulf infrastructure came under threat and the Strait of Hormuz grew volatile. Higher oil prices mechanically increase global demand for dollars, while crisis conditions drive capital towards familiar safe havens. The petrodollar system is functioning exactly as designed. The very instability expected to undermine the dollar is, in the immediate term, reinforcing it.

But this strength is deceptive. The same conflict that boosts short-term demand is corroding long-term confidence. Expanding US fiscal deficits, rising energy costs for allied economies, depletion of military stockpiles that require costly replenishment, and mounting political pressure on monetary policy all weaken the structural foundations of dollar dominance. The result is a dual movement: short-term appreciation alongside long-term erosion.

If Trump succeeds without Asian help, China may find that the opportunity it saw in American overstretch has closed, and that the cost of not acting when it mattered has been a strategic position it cannot easily recover

If Trump succeeds without Asian help, China may find that the opportunity it saw in American overstretch has closed, and that the cost of not acting when it mattered has been a strategic position it cannot easily recover

The trend towards de-dollarisation is real, but often misunderstood. In the 1970s, the dollar accounted for roughly 85% of global foreign exchange reserves; today it stands closer to 59%. Non-dollar energy transactions have increased, and China’s financial architecture — including yuan-denominated oil contracts and cross-border payment systems — is expanding.

These are meaningful adjustments. But they are hedges, not replacements. The central question remains largely unanswered and is too often avoided: what actually replaces the dollar?

Not the yuan. It lacks full convertibility, operates under strict capital controls, and depends on financial institutions that do not provide the legal transparency or creditor protections required for a global reserve currency. Replacing dollar dependence with yuan dependence is not systemic reform; it is substitution under different constraints.

Not bilateral currency arrangements. A fragmented system of local-currency trade would require thousands of exchange mechanisms and liquidity pools, dramatically increasing transaction costs and excluding weaker economies from efficient participation in global trade. Even limited experiments have revealed these limitations, with imbalances quickly becoming unmanageable.

Not multilateral instruments such as IMF reserve assets, which remain structurally constrained by the governance power of the very system they would need to replace. The conclusion is not theoretical but practical: there is no clean successor.

At the same time, the financial dimension cannot be separated from the strategic one. The war is forcing reallocations of American military resources that are reshaping global perceptions of reliability. Assets diverted to the Middle East leave gaps elsewhere. Allies notice the delays. Adversaries test the margins. From East Asia to the Gulf, states are hedging financially, militarily, and diplomatically against uncertainty.

These responses are interconnected; financial hedging and strategic hedging are parallel reactions to the same underlying shift: declining confidence in the system's guarantor.

Nowhere is that declining confidence more visible than in the physical geography of oil itself. The Strait of Hormuz, through which approximately one-fifth of global oil supply passes, has become a contested waterway where Iran has demonstrated the capacity to determine which ships transit and which do not.

The petrodollar system's physical foundations, long taken for granted, are now under direct assault. Notably, both Princeton professor Bernard Haykel and US President Donald Trump have independently observed that most Gulf oil flows east to China, Japan, and other Asian economies, and that those economies must therefore shoulder responsibility for securing the waterway.

When none of those countries responded positively to Trump’s demand, he announced that the United States would secure Hormuz unilaterally. That declaration raises a question that only time will answer: how will Washington treat the Asian economies that declined to share the burden if it succeeds in securing the strait alone?

A US-controlled Hormuz would give Washington significant leverage over the energy flows that Asian economies depend on, over the Arab states whose oil revenues fund their sovereign wealth and dollar-denominated assets, and over the petroyuan experiments that China has been cultivating precisely to reduce that dependence.

If Trump succeeds without Asian help, China may find that the opportunity it saw in American overstretch has closed, and that the cost of not acting when it mattered has been a strategic position it cannot easily recover.

© The Friday Times