U.S. dollar dominance, reserve currency status, debated amid Iran war

The U.S. dollar suffered in 2025 as investors embraced the “Sell America” trade, the Federal Reserve cut interest rates, and the greenback was dealt a policy and fiscal credibility shock. The war in Iran has helped shore-up the dollar so far in 2026, but the future of the global reserve currency is a matter of growing debate.

Deutsche Bank has prompted discussion after one of its strategists predicted that the dominance of the U.S. dollar could be eroded if countries decide to price crude in alternative currencies. 

The Iran war could be remembered as a key catalyst for “erosion in petrodollar dominance, and the beginnings of the petroyuan,” Deutsche FX managing director Mallika Sachdeva said in a note published March 24.

Franklin Templeton responded on April 14 with a note that called the analysis “remarkably simplistic,” writing that Sachdeva has misinterpreted the security-for-oil-pricing relationship with Saudi Arabia.

“Oil is not priced in US dollars simply because the United States has long acted as the world’s policeman,” wrote Sonal Desai, Franklin Templeton’s fixed income CIO.  

“Oil exporters have a strong self-interest in getting paid in USD, because of what dollars represent: access to the deepest, most liquid capital markets in the world, backed by an institutional and legal framework that protects property rights and enforces contracts, supported by a strong, dynamic, and innovative economy.”

During the first half of 2025, the dollar posted its worst performance in over 50 years after U.S. President Donald Trump walked back his “liberation day” tariffs announced in April, rattling faith in the country’s assets.

The dollar index, which tracks its performance against a basket of major currencies, fell almost 10% through 2025. 

It enjoyed something of a reprieve after the Iran war began on Feb. 28, strengthening against all major currencies and moving in tandem with the oil price, before weakening again as hopes of peace have brought down crude and WTI prices.

Deutsche and Franklin’s positions represent two ends of the spectrum in the de-dollarization discourse.

Deutsche is among those who see the currency in structural decline, while Franklin lines up with those who see no alternative.

The proportion of dollar reserves has fallen over the decades, from over 70% in 1999 to just over 50% today. Other currencies, such as the renminbi and euro, have taken a larger slice of the pie, yet the dollar retains hegemony. 

While the dollar has its flaws, it is difficult for analysts to see a world without it dominating global trade.

“There is no alternative,” Elias Haddad, global head of markets strategy at Brown Brothers Harriman, told CNBC in an interview. “All other currencies are nowhere near an environment to replace the dollar.”

China comprises a 3% share of global central bank reserves and is gradually increasing its influence, as part of a long-term plan to internationalize its currency.

“But there’s no way China is going to get to 50% anytime soon, especially with their capital markets closed. It’s the same for the Eurozone,” Haddad said.

Franklin Templeton’s Desai added in the note that building the right infrastructure for a credible replacement, consisting of “deep markets, rule of law, full convertibility, a track record of macro stability”, takes decades, not years.

On the other hand, Deutsche’s point that the U.S. security umbrella in the Gulf has been strained since the war began is another example of fading confidence in U.S. trade and security policies that further damages the dollar’s reputation, Haddad added.

He said that fading U.S. fiscal credibility and the Federal Reserve being undermined by Trump are two more reasons why the structural downtrend has further to go.

This could create a scenario in which the dollar’s reserve status is gradually eroded, but not eliminated; weaker, but not replaced.

Desai added that the dollar’s recent weakness is simply a function of its characteristics. 

“Some dollar softness is perfectly consistent with global reserve currency status,” Desai wrote. 

“Unlike the renminbi, the dollar is a freely floating currency. It floats – up and down.”