In the 56 days between the abduction of Venezuela’s president and the assassination of Iran’s supreme leader, Donald Trump demonstrated that the United States can still project power on a scale no other nation can match. What remains an open question — and an increasingly urgent one for global markets — is whether anyone will still trust the country that wields it. The Iran war has pushed oil past $120 a barrel, shut down the Strait of Hormuz, and rattled every asset class on the planet. But the deepest wound may not be measured in barrels or basis points. It may be the slow, irreversible erosion of confidence in the dollar and the institutions that underpin it.
Before the escalation in Iran, the dollar was already under pressure, having lost roughly 10% of its value on a trade-weighted basis since the start of Trump’s second term. Then the bombs started falling. As stocks swooned, the dollar staged its biggest two-day rally in nearly a year — the old safe-haven reflex kicking in. By March 10, 2026, the dollar index had settled at 98.81, though traders remain cautious after Trump’s mixed signals about the war’s duration.
A Sequence of Supply Shocks
The damage to the real economy is stacking up fast. Nonfarm payrolls fell by 92,000 in February 2026 — the second-largest monthly decline in job creation in recent years — against expectations for a gain of 50,000. The unemployment rate ticked up to 4.4%, one of the highest levels since 2021. Employment in the federal government has trended downward as part of the administration’s push to pare the workforce.
Now layer the Iran oil shock on top. Since the fighting began, the price of urea fertilizer has spiked 15%, with higher costs often translating into rising food prices. Economists warn of a “perfect storm” of significant stagflationary pressures as energy and commodity prices surge while the labor market weakens.
The Fed in No Man’s Land
The timing could not be worse for the Federal Reserve. Kevin Warsh, Trump’s nominee to replace Jerome Powell as Fed chair, is expected to take office when Powell’s term expires on May 15, 2026. Warsh has recently expressed support for lower interest rates, a view shared by the president.
But the war has complicated that plan. The oil shock carries clearer consequences for inflation, potentially forcing the Fed to maintain higher rates even as the economy slows. Furthermore, the administration’s broader pressure on the Fed has raised concerns about its institutional independence. Republican Senator Thom Tillis has vowed to block any Fed nominee — including Warsh — until a Department of Justice criminal probe into Chairman Powell over a building renovation project is fully resolved.
The Dollar’s Paradox
Here lies the central irony. The war has temporarily strengthened the dollar as a haven, but the policies surrounding it are systematically degrading the foundations on which that status rests. The dollar’s share of global foreign exchange reserves has fallen from over 70% in 2001 to about 57% today. Yet the US currency is still involved in approximately 88% of all foreign exchange transactions — the highest in 25 years.
That gap is where the risk lives. Analysts argue the Iran conflict is strengthening the alignment between Iran, China, and Russia, forcing countries to reconsider their reliance on the US financial system. Beijing sees an opening as Trump’s combination of tariff chaos and military adventurism allows China to argue that the US is no longer a reliable steward of the global order. Trump has been clear about protecting the dollar’s status, previously warning that any BRICS country attempting to replace the dollar with a rival currency would face 100% tariffs. But threats of punishment may be a poor substitute for the trust that once made such measures unnecessary.
Whether the war ends this week or grinds on for months, the sequence of 2026 — from Venezuela to the Strait of Hormuz — has shifted what investors must price in from Washington. The dollar may survive this crisis, but the world’s faith in the system behind it may not survive the presidency.
Original analysis inspired by from . Additional research and verification conducted through multiple sources.
By ThinkTanksMonitor
