THE MIGHTY DOLLAR

 The Mighty Dollar

America's most powerful weapon is its currency that it deploys in every major conflict

What missiles, bombs and a naval blockade couldn't do in six months, US now hopes to achieve with tougher sanctions on Iran. It's described "Operation Economic Outcast'  as the "single greatest financial offensive ever."  Leave aside the hyperbole, what it really means is that US will go after everyone having any financial dealings with Iran. The idea is to financially starve Iran into submission. Will it work? That's debatable, but the fact that "economic warfare' has become US's "nuclear option" in every conflict, from Cuba to Russia, is a testament to dollar's continuing strength 82 years after Bretton Woods.

It was in 1944 that 44 Allied nations agreed to peg their currencies to dollar, which was pegged to gold at the time. And the system continued, rather expanded, even after US dumped the gold standard in 1971. In fact, it's become so big that it's considered too big to fail. and that implied sense of safety makes it even more indispensable in difficult times, although enough central bankers would relish it supplanted. 

So, how big is dollar? In 2016, 65.4% of forex reserves were held in it globally. Euro, the second biggest reserve currency, had 19.1% share. By 2025, dollar's share had slipped to 57,7%, and euro's had risen to 20.1%, but in absolute terms, dollar holdings globally grew from $5.5tn to $6.7tn in the same 10-year period. More importantly, around 90% of global forex transactions still occur in dollar. Commodities like oil, gold and coffee are all priced in dollar. And most dollar transactions are routed through American banks which is why America can weaponise dollar so effectively. It can stall payments, and freeze assets, like it did with over $300bn worth of Russian central bank assets in 2022.  And that's what it 's threatening to do to Iran's financial partners.

America's action against Russia had rattled central banks, and there had been many discussions to devise alternatives over four years, but there is no immediate threat to dollar's dominance. Simply because no country other than US, offers the scale of economic, political and financial stability, as well as openness of financial markets and currency convertibility. Dollar is simply the most efficient way to deal financially, outside your own country's borders. Euro or some other candidate might become world's preferred reserve currency one day, but that day is probably decades away.

The editorial in The Times of India 26 August 2026