Chatham House
Open Dollar dominance is surviving the Iran war – just aboutDollar dominance is surviving the Iran war – just about
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sfarrell.drupa…
16 April 2026
The war doesn’t seem to have damaged the dollar’s global status. But that may reflect the US’s emergence as the top producer of oil, gas and weapons, which insulates its economy from the crisis.
A central characteristic of the dollar’s role as the world’s pivotal currency is that the US bond market, and the greenback itself, act as safe havens in times of stress.As anxiety levels rise during a crisis, institutional investors and governments flock to dollar-denominated assets because US capital markets are easier to trade in and out of than any others; and because the ability of the Federal Reserve to act as lender and liquidity-provider of last resort is second to none. In the end, it is US trustworthiness that underpins all this. But since global trust in the US seems to be eroding, both before and during this year’s war on Iran, it is worth asking whether the dollar’s safe-haven status is showing any signs of ill-health.
The performance of US asset prices may say less about the dollar’s status than it does about the relative insulation of the US economy from the crisis.
The quick answer is no, but it would be wrong to conclude that all is well, for two reasons. In the first place, the performance of US asset prices may say less about the dollar’s status than it does about the relative insulation of the US economy from the crisis.And second, China’s capital markets are emerging really very well from the current crisis, which might give Washington some pause for thought.Effect of the warFirst, it is worth considering what actually happened between the start of the war and the 7 April ceasefire, to the dollar, to US bond yields, and to the US stock market.In principle, a true safe haven will see the currency strengthen, bond yields fall and stock markets perform relatively well when things go wrong globally.By those standards, US asset prices haven’t done at all badly. The dollar strengthened by around 2 percent against a basket of other currencies; and the S&P stock index fell by less than its peers. And while the yield on a US government 10-year bond rose around 35 basis points to 4.3 percent, that increase was also smaller than many US peers: 10-year German yields, for example, rose by 45 basis points.Compare this to dramatic episodes in the past – the 2008 Lehman Crisis, the start of the 2003 Iraq war, or the attacks on the US in September 2001 – and what we’ve seen in recent weeks still shows US markets in a respectable light.The move in the dollar’s exchange rate, for example, is comparable to what happened in the weeks after the 1991 Gulf War, and has been much stronger than the greenback’s response to the 2003 war, when it weakened sharply.The outperformance of the US stock market is also consistent with earlier episodes, with the exception of the 2003 war, when US markets fell very sharply by comparison with others.The rise in US bond yields is also comparable with the past. Although US yields fell after 9/11 and after the start of the 2003 war, they rose in the weeks after the Lehman crisis.Moreover, at least some of the increase in US bond yields – and corresponding fall in bond prices – must result from the selling of US government bonds by foreign central banks seeking to address domestic concerns.The Turkish central bank, for example, has relied heavily on selling US bonds to raise dollars that it can use to defend the lira, fearing that a sharp depreciation of the local currency would boost inflation and encourage a mass flight to the dollar by Turkish residents. Other central banks are very likely to have done the same, albeit that the data are scanty.While this decent performance of US asset markets in recent weeks suggests, on the face of it, that the war hasn’t done any damage to the dollar’s global status, these positive results may simply reflect the US’s emergence in recent years as the world’s top producer of oil, gas and weapons, which all help insulate the economy from the crisis.So, the market might simply be reacting to a conjunctural fact about the US economy, rather than a structural fact about the role of the dollar in the international financial system.ChinaMeanwhile, Chinese financial markets have exhibited extraordinary calm, with the government’s 10-year bond yield unchanged at 1.8 percent, quite unlike increases in bond yields seen almost everywhere else. The Chinese equity market has weakened a bit, but the renminbi has strengthened.
The strengthening of the Chinese currency in recent weeks is especially notable.
Indeed, the strengthening of the Chinese currency in recent weeks is especially notable, since it makes China the only energy importer in the world whose exchange rate has appreciated since the war began.The appearance of calm in Chinese financial markets may also reflect some conjunctural facts about China’s economy which help protect it from the worst consequences of the war. Although China is a large energy importer, for example, its electricity generation depends hardly at all on oil and gas: coal is the dominant energy source, along with solar, wind, nuclear and hydro power.Meanwhile, the war barely affected Iranian crude shipments to China, an economy which in any case has some 1.4 billion barrels of oil in reserve, around three months’ worth of consumption.