War in West Asia, cracks in dollar order

Since Donald Trump returned to the presidency of the United States have had a significant impact on the global financial system, from the imposition of tariffs on ‘Liberation Day’ to the continuing tensions in West Asia. Concerns over the security of the Strait of Hormuz, a critical oil transit route, briefly pushed Brent crude prices sharply higher and renewed fears of supply disruptions. Simultaneously, threats by the US to impose secondary sanctions on countries trading with Iran have once again highlighted the weaponisation of the dollar by the world’s only superpower.

These developments have compelled oil-dependent countries to think more seriously about de-dollarisation—the systemic efforts by nations to reduce dependence on the US dollar in trade, reserves and financial transactions. Rising crude prices force countries such as India, China, and Brazil to spend more dollars on oil imports, weakening their own currencies in relative terms. 

Nations have largely tolerated the dollar hegemony since the end of the Second World War. Today, however, the US dollar appears less a stabilising force and more a liability. Though no currency currently can replace the dollar as the reserve currency, recent war seems to have accelerated the search for alternatives. 

The US dollar has been the reserve currency in international trade, reserves, and finance through most of the postwar era. A substantial share of global trade invoicing is still conducted in dollars, while most international payments flow through the SWIFT (Society for Worldwide Interbank Financial Telecommunication) system, dominated by US banks. The US national debt has crossed $38 trillion with central banks around the world holding large quantities of US Treasury securities. The cost of the West Asian conflict, which is about $25 billion for the US military, is expected to place further pressure on the American national debt.

Economic sanctions, including the freezing of Russian state and private assets across the world during the Russia-Ukraine war, exposed the risks associated with overreliance on a dollar-denominated system. 

For de-dollarisation to gather momentum, countries must build alternative payment mechanisms. The BRICS grouping, which currently has 11 members, has become a leading advocate of currency-based trade settlements. The control for the global payment system has begun with Brazil contemplating activating the BRICS bridge system. Through this system, it becomes possible to make cross-border payments in international trade without the involvement of US banks. BRICS PAY will feature a decentralised cross-border messaging system (DCMS) done through blockchain technology, completely bypassing the Western-controlled SWIFT mechanism.

India, as a key member of BRICS, has also taken measures to reduce its dependence on the dollar. Rupee-based oil purchases have increased, indicating a gradual shift towards currency diversification. Elsewhere, euro-riyal and yuan-ruble trading corridors are moving from experimental pilots to mainstream trade routes. Some Gulf countries, long considered pillars of the petrodollar system, have also begun exploring “mBridge” transactions that settle energy trade using central bank digital currencies (CBDCs) rather than the US dollar. 

Developments over the last few years also indicate a gradual move away from fossil fuels to renewable energy sources such as wind, solar and green hydrogen. India, one of the world’s fastest-growing renewable energy markets, is witnessing a surge in demand for strategic minerals such as lithium, copper, and nickel. Central banks, meanwhile, have been aggressively buying gold and reducing their exposure to US Treasury holdings. Gold’s share in India’s foreign exchange reserves has risen to 16.7% from 8% over the last few years. Unlike dollar-denominated assets, gold held by central banks cannot be frozen through unilateral sanctions as imposed lately by Trump. The foundations of global finance may therefore be shifting—from oil-based systems to resource- and metal-driven dynamics.

All these developments point towards a polarised world. On one side is the traditional dollar-based system, which is seen as risky by the Global South. On the other is a fragmented, multi-currency landscape led by the BRICS digital infrastructure, characterised by bilateral agreements. There is also the polarisation between energy-independent and energy-dependent nations. While the US has enough oil reserves and shale gas, the rest of the world, especially Europe and East Asia, has borne the brunt of the war surcharge that is imposed on them.

The West Asia war did not start the de-dollarisation movement; it has acted as a catalyst. While it is difficult to answer how long the US can continue its monetary imperialism, it is a fact that the global payment system might be undergoing a subtle shift away from the dollar.

(The writers are former bankers and currently teach at the Manipal Academy of Higher Education, Bengaluru)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.