From Ukraine to Iran: Have the Rules of Dollar Domination Changed?

SadaNews - The discussion of the beginning of the end of dollar dominance has increased since the COVID-19 pandemic, passing through the Ukraine war, and culminating in the recent tensions in the Middle East due to the Iran War.

However, the data reveals a more complex reality: a gradual decline in some indicators, contrasted with a deep-rooted presence at the heart of the global financial system.

Reserves: Gradual Decline and Diversification Towards Gold

The share of the dollar in global reserves has decreased to about 56% in 2025, compared to around 59% in 2020 and over 70% at the beginning of the millennium, according to data from the International Monetary Fund, indicating a continuing trend of diversification away from the American currency.

However, this decline does not necessarily reflect a replacement of the dollar with a single currency, but rather a gradual shift towards a broader basket of assets, including gold and smaller currencies.

An analysis by the Federal Reserve shows that the current share brings the dollar back to levels seen in the mid-1990s, with relative stability since 2022 despite the escalating use of the dollar in financial sanctions following the Ukraine war.

The IMF also indicates that the bulk of this decline has not gone to major currencies like the euro, yen, or pound, but rather to what are known as "non-traditional currencies," such as the Australian and Canadian dollars, along with the Korean won, the Singapore dollar, and Scandinavian currencies.

This reflects a trend toward diversifying risk within the existing financial system, amid the absence of a significant alternative capable of competing with the dollar in terms of depth and liquidity, alongside restrictions limiting the use of certain major currencies like the yuan.

Conversely, gold stands out as one of the biggest beneficiaries of this shift, as analyses by Bloomberg based on IMF data and an adjusted valuation methodology indicate that the market value of gold reserves held by central banks has surpassed that of dollar assets for the first time since the late 1990s.

It also shows that the actual demand for the dollar, after excluding returns, has fallen by about 15% since its peak in 2014, while actual gold holdings have increased, reinforcing the hypothesis of a shift in reserve preferences.

In the background, gold continues to cement its position as a "silent alternative." Central bank purchases reached about 863 tons in 2025, according to the World Gold Council, which is below the peak levels of the previous three years, but still much higher than the average of the previous decade, reflecting central banks' ongoing trend toward asset diversification and hedging against geopolitical risks.

Global Finance: A Clearer Grip by the Dollar

If the picture of reserves suggests a gradual decline in the dollar's status, international financing indicators reflect a more solid reality.

Data from the Bank for International Settlements indicates that dollar-denominated credit outside the United States reached $14 trillion by the end of 2025, more than half of which is in the form of debt instruments, highlighting the extensive global reliance on the American currency for financing.

A study on "The International Role of the Dollar" released by the Federal Reserve in 2025 shows that the dollar still accounts for about 60% of debt issuances in foreign currencies since 2010, compared to about 26% for the euro. It also holds about 55% of international bank claims and nearly 60% of liabilities, levels that have remained relatively stable over the years.

The figures reflect a fundamental truth: countries and companies wanting to reduce their exposure to the dollar still depend on it due to the depth of its markets, its liquidity, and the lower cost of financing compared to alternatives.

However, this dominance is not only linked to market characteristics but also to the mechanisms that have supported it for decades. The global financial system has relied on continuous inflows from abroad, especially from China and Gulf states, which recycled their dollar surpluses into American assets.

Bloomberg estimates that these inflows, which peaked at around $5 trillion, contributed to lowering borrowing costs in the U.S. by about half a percentage point, thereby supporting investment and growth.

Yet, this model has begun to change gradually. China has reduced the pace of its dollar reserve accumulation, while Gulf states are redirecting their surpluses towards local investment and major projects, indicating that while the dollar remains dominant in global financing, the environment that has supported this dominance for decades has started to transform.

Global Trade: The Noise of Decoupling

In global trade, the picture appears more ambiguous, as political rhetoric has escalated since 2022 regarding pricing in local currencies and expanding the use of the yuan, yet the data does not currently indicate a radical shift in the structure of the system.

A joint study by experts from the European Central Bank and the IMF, covering over 120 countries up to 2023, concluded that the dollar and euro still account for more than 80% of global trade invoicing. Excluding trade within the eurozone, the dollar's share alone rises to about 60% of global export invoicing, while the yuan's share remains below 2% globally despite a gradual increase.

IMF analyses from 2025 confirm that these shares have remained "broadly stable" in recent years, with the dollar continuing to dominate commodity trading, especially in oil, despite rising calls for the use of alternative currencies.

Nevertheless, regional shifts are becoming evident. The share of the yuan in China's trade with the world increased to about 25% in 2023, compared to only 2% in 2010, reflecting a trend toward expanding the use of the domestic currency in bilateral transactions. This is also linked to Beijing's move towards a more flexible exchange rate system, which reduces the need to accumulate dollars and minimizes its intervention in the currency market.

These developments weaken the narrative that merely announcing settlements in local currencies signifies a rapid decline in dollar dominance, as they remain selective and limited in scope for now.

This issue gains greater sensitivity amid the current geopolitical tensions, particularly in the Strait of Hormuz, through which nearly one-fifth of the world's oil supplies pass.

Any disruption in this corridor affects not only supplies and prices but also pricing mechanisms and settlement currencies, as oil trading continues to be largely priced in dollars.

The conflict in Iran has reignited discussions around using the yuan in energy trade, with reports of acceptance of payments in the Chinese currency in exchange for facilitating the passage of ships through the Strait of Hormuz. Meanwhile, the Chinese Cross-Border Interbank Payment System (CIPS) has reported record levels in transaction volumes, surpassing the one trillion yuan mark for the first time, reflecting an increased demand for the Chinese currency in energy-related contexts.

Malika Sachdeva, a strategist at Deutsche Bank, has stated that the war may act as a "catalyst for the erosion of petrodollar dominance and the rise of petroyuan," amid escalating pressures on the traditional oil pricing system.

However, analysts, including Chi Lo at BNP Paribas Asset Management, view that while Middle Eastern conflicts will boost incentives to use the renminbi in oil trade, especially in developing countries, it remains tied to exceptional circumstances such as sanctions and geopolitical restrictions, and does not reach the level of a structural shift in the global oil pricing system.

Thus, its global impact remains limited unless these initiatives transform into permanent and broad-based arrangements for pricing energy and settling in alternative currencies.

Payments: The Dollar as "Infrastructure" of the Financial System

The clearest test of the dollar's strength does not appear in reserves or even in trade, but in the global payment systems that form the backbone of cross-border financial flows.

Data from SWIFT for February 2026 indicates that the dollar accounted for about 57.5% of international payments excluding payments within the eurozone, and about 50% of total global payments, reflecting its ongoing dominance over money movement worldwide.

In contrast, the yuan's share stood at only 2.1%, despite improving its ranking during certain periods, while estimates from the Federal Reserve indicate a stable dollar share at around 50% with a slight upward trend.

These numbers explain why discussions about the "end of the dollar" seem premature. The dollar functions not only as a reserve currency or an invoicing tool but as an operational infrastructure for the global financial system, from banking correspondences and currency markets to debt pricing and trade financing.

Even as some countries seek to build alternative channels, these efforts remain limited in scope, as most transactions ultimately remain connected to a global financial system that relies on the dollar as a reference currency or ultimate hedging tool.

What Pressures Dollar Dominance?

Nevertheless, the resilience of dollar dominance does not imply that pressures on it are limited; the years since 2020 have revealed a gradual transformation in the geopolitical and economic environment that has supported this dominance for decades.

The IMF links this transformation to increasing economic fragmentation globally, the rapid advancement of financial technology, and central banks' trends toward diversifying their reserves away from traditional assets.

However, the most significant turning point came after the Ukraine war in 2022, when the U.S. and its allies froze about $300 billion of Russian assets, a move that demonstrated that the dollar is no longer just a reserve currency but a tool that can be used in geopolitical conflicts.

Joint studies between the IMF and the European Central Bank indicate that trade invoicing patterns have increasingly begun to reflect political alignments since then, with some countries resorting to the use of alternative currencies in their bilateral trade to reduce exposure to the Western financial system.

This is more evident in sanctioned economies, where an increasing proportion of trade, such as trade between Russia and China, is settled in local currencies, including major energy deals outside the dollar system.

In some economies that have politically distanced themselves from the West, the dollar and euro's share in trade invoicing has significantly declined, but these shifts have remained geographically confined and have not yet changed the global picture.

The war in Iran and the tensions surrounding the Strait of Hormuz have added another layer of pressure, with disruptions to energy flows and questions raised about the stability of the dollar pricing system.

In addition to geopolitical shocks, the growing use of the dollar as a sanctions tool, especially after the freezing of Russian assets, stands out as one of the most prominent factors driving countries to reevaluate the risks of holding it.

Conversely, the rising U.S. debt and escalating deficit levels following the COVID-19 pandemic add another layer of concern, as gold emerges as one of the primary beneficiaries, with central banks increasing their holdings of it as a "neutral" asset.