Will Iran War Break The Dollar? Currencies Don't Last Forever Warns Economist | Barry Eichengreen

The stagflation dilemma

The Fed faces a 'classic central banker's nightmare' where the Iran war's energy shock creates simultaneous inflationary pressure (requiring rate hikes) and economic weakness (requiring cuts), forcing difficult trade-offs.

Independence paradox

The more President Trump and Treasury Secretary Bessant pressure the Fed to lower rates, the more the central bank must keep rates elevated to signal to markets that it remains a credible, independent inflation fighter.

Warsh's institutional challenge

Incoming Fed Chair Kevin Warsh must prioritize reasserting the Fed's autonomy from the White House and Treasury while resisting 'mission creep' into non-monetary issues like climate policy, even at the cost of presidential goodwill.

Safe haven status wavers

The dollar weakened during the April 2025 tariff volatility despite spiking market uncertainty, breaking from its traditional pattern, though it recovered modestly following the February 2026 Iran war outbreak.

No alternative exists

No rival currency can fill the dollar's role—the Euro lacks sufficient safe assets, China's renminbi remains far behind, and smaller currencies like the Australian dollar or Singapore dollar are collectively too small to provide global liquidity.

Liquidity crisis risk

Without a replacement currency, a crisis of confidence in U.S. policy competence or debt sustainability could trigger flight to gold and illiquid assets, creating a 1930s-style liquidity shortage that threatens global trade.

Foundations of monetary dominance

Throughout history from ancient Rome to the British pound, reserve currencies rose on economic, commercial, financial, and military strength combined with robust political institutions including separation of powers and reliable alliances.

Warning signs of decline

Currencies collapse when powers exhibit economic stagnation, military overreach, unsustainable debt—currently over 100% of GDP and rising 6% annually in the U.S.—and fraying geopolitical partnerships like NATO.

Institutional decay threat

Current U.S. political dysfunction, including attacks on Fed independence and rule of law, mirrors historical patterns that preceded the fall of previous reserve currencies, threatening the dollar's longevity despite its current supremacy.