The Dollarization Paradox: Why a Weak Dollar Year Coexists With a Strengthened Dollar Architecture

Reading the Currency Debate Through the Lens of the 2026 Iran War — and What It Means for Capital Deployed Through 2030

Three Things to Hold On To

A few things worth keeping in mind before we go further.

The dollar had its worst calendar year in over fifty years in 2025, falling close to 10% on the dollar index. That is the first fact, and it surprised most observers — including me, I will admit. Yet despite that performance, the dollar's share of global foreign exchange reserves moved by less than two percentage points across the year, and on the most recent BIS Triennial Survey released in September 2025, the dollar's share of global FX transactions actually rose. Both facts are true. They sit awkwardly together, and that awkwardness is the substance of this note.

The Iran war that began on 28 February 2026 has, in nine weeks, produced the largest oil supply disruption in history — Brent peaked above $120, the Strait of Hormuz was effectively closed for most of March, and the dollar strengthened immediately on flight to safety, only to give back gains as the conflict's contours hardened. The currency response, in my reading, is the single most important data point of the year for understanding where the dollar actually stands.

And — this is the part I think many boards still misread — the contradiction between dollar weakness in markets and dollar resilience in structure is not a contradiction to be resolved. It is the actual shape of the system as of May 2026. The architecture sustaining dollar dominance and the architecture eroding it are operating simultaneously, on different timelines, and pretending one will eliminate the other in the next 24 months is, I think, the analytical mistake to avoid.

The institutional architecture of dollar dominance — strongest in three years on most market metrics, contested in structure for the first time in eighty.

Opening

The dollar used to be a settlement convenience. Today it is, first and foremost, a strategic instrument — a status that has been accelerated by the second Trump administration's first year in ways that I did not fully anticipate when I wrote earlier this year on geopolitical trade risk.

You will not find a doom scenario on the dollar in what follows. You will not find its opposite either. The recent debate in the financial press — Deutsche Bank's late-March note arguing the Iran war marks the beginning of petroyuan dominance, Franklin Templeton's mid-April response calling the analysis "remarkably simplistic" — is, in my reading, framed badly on both sides. Not because either is wrong on its own terms. Because the question they are debating is the wrong question.

My aim is simpler: to take a step back, look at why this moment seems durable rather than episodic, and draw a few implications for the way your portfolio or treasury function is positioned. I will flag my uncertainties along the way — there are several, and a few of them have grown since February.

The Data Behind the Dollarization Paradox: What IMF COFER and BIS Tell Us

Let us take the facts as they stand.

In the third quarter of 2025, according to the IMF's Currency Composition of Official Foreign Exchange Reserves dataset — under its new methodology, revised in November 2025 — the U.S. dollar accounted for 56.92% of global allocated reserves. The euro stood at 20.33%. The Chinese renminbi, despite a decade of internationalization efforts, sat at 1.93%. Total global reserves reached $13.0 trillion.

Look beyond the reserves number. The picture sharpens. The BIS Triennial Survey of April 2025, published in September, found the dollar on one side of 89.2% of all global foreign exchange transactions — up from 88.4% in 2022. In other words, on the metric that captures the daily plumbing of the global currency system, the dollar's footprint expanded over the three years dominated by the Russia sanctions cycle, the AI capex boom, and the early signs of BRICS payment infrastructure construction. Trade invoicing in dollars sits around 54%, per Federal Reserve research, essentially unchanged. The reserve share has declined from its 2001 peak of about 72%, yes, but compare 2026 to 2022 and you find it almost unchanged. Three years of war in Ukraine, sanctions cycles, Iran maximum pressure, and BRICS expansion have moved the needle by less than two percentage points.

So on every market metric that matters, the dollar in 2026 is not a currency in retreat. The narrative of "imminent dollar collapse" that circulated regularly through 2025 simply does not match the data. What did happen in 2025 — and this is the part I think is being conflated with structural decline — is that the dollar fell roughly 10% on the dollar index, its worst performance in half a century. The Sell America trade, sustained pressure from the Trump administration on the Federal Reserve's independence, and a fiscal credibility shock combined to produce that result.

That is not a structural weakening. It is, in my reading, a cyclical correction in dollar strength after years of overshoot — happening alongside, but not consistent with, the structural dominance the BIS and IMF data describe.

And yet — and this is where the framing has to shift — central banks across the Global South are spending real political capital, and significant technical resources, building infrastructure designed to operate without the dollar at its center. Why?

A Structural Shift, Not a Cycle: The Sanctions Architecture as Catalyst

I would be cautious about reading the sanctions surge of the last three years as simply political theater.

The numbers tell their own story. OFAC sanctioned more than 1,300 individuals and entities in 2025. That is below the peak years of 2022 to 2024, when the Russia regime drove the volume up, but it remains a substantial figure by any historical standard. On 22 October 2025, OFAC imposed full blocking sanctions on Lukoil and Rosneft — Russia's two largest oil producers, hit with the most aggressive tier of OFAC designation. These were the first Russia sanctions of the second Trump administration, ending a pattern of restraint that had defined its first nine months in office. Earlier the same year, in June, GVA Capital was handed a $215 million penalty. That was the largest civil penalty OFAC had imposed since Binance in 2023. Each of these moves, taken in isolation, is a discrete enforcement action. Taken together, they signal something else: an institutionalization of sanctions as foreign policy reflex, not exception.

Add to this the Iran war. The conflict that began on 28 February 2026 was preceded by months of intensifying sanctions designations targeting Iranian evasion networks. The Trump administration relaunched maximum pressure on Iran within weeks of taking office. The military action of 28 February did not come out of nowhere — it was the culmination of a sanctions architecture that had become, by late 2025, structurally incompatible with the Iranian regime's continued integration in any dollar-mediated trade. And the December 2024 threat by the President-elect of a 100% tariff on any BRICS country pursuing dollar alternatives sits on top of all of this.

The cumulative message — and this is the part I think markets underweight — is that the sanction is no longer the exception. It has become a structural variable in the way the international financial system operates. The Iran war is the most extreme expression of this, but it is consistent with a broader pattern.

Once that perception sets in among foreign central banks, sovereign wealth funds, and major commodity exporters, the calculation shifts. The construction of escape routes is no longer ideological. It is structural. It is, increasingly, a matter of basic risk management for any institution that might one day find itself on the wrong side of a Washington decision — and the definition of "wrong side" has been expanding faster than most boards have processed.

This is, I think, the central point that gets lost in the standard "USD is here to stay" commentary. The dollar's architecture of dominance is producing, mechanically, the conditions of its own contestation.

mBridge and BRICS Pay: parallel financial infrastructure that did not exist five years ago, now handling real-value transactions at scale.

The Alternatives Are Operational, Not Aspirational

This one I follow closely, because the gap between what the public narrative says and what the operational reality looks like is wider than commonly understood — and the Iran war has made it wider still.

Three architectures matter here. None of them is conceptual anymore.

Take mBridge first. Quick history. The BIS Innovation Hub launched it in 2021, bringing together four central banks — Hong Kong, Thailand, the UAE, and the People's Bank of China. The Saudi Central Bank came on board in June 2024, which mattered more than the press coverage suggested. By mid-2024, the platform had reached what engineers call minimum viable product status. That technical milestone is the one that counts — MVP, in this context, means real-value transactions on a live platform, not pilot demonstrations among observers.

The numbers, as of January 2026, are not negligible. According to data compiled by the Atlantic Council, mBridge has now settled more than 4,000 cross-border transactions, for a cumulative value around $55.5 billion. That is roughly a 2,500-fold increase since the early pilot phase of 2022. China's digital yuan accounts for about 95% of total settlement volume. And here is the part the financial press tends to misread: when the BIS announced its withdrawal in October 2024, it described the move as a "graduation," not a retreat. Language matters. The participating central banks have carried the project on independently — and the current Iran disruption has, by all accounts I am hearing, accelerated their internal investment cases.

Then there is the BRICS Cross-Border Payments Initiative — formalized, finally, at the Rio Summit in July 2025. The architecture integrates a Decentralized Cross-border Messaging System engineered to function without SWIFT, with a reported target capacity of 20,000 transactions per second. BRICS Pay enters pilot phase before the end of 2026, under India's chairmanship of the bloc. The BRICS Council reports that local currencies accounted for approximately 65% of intra-BRICS trade in 2024 — up from around 30% just three to four years earlier. Russian Foreign Minister Sergey Lavrov claimed in May 2025 that the share had risen to 67%. The often-circulated 90% figure refers specifically to Russia's transactions with BRICS partners, not intra-BRICS trade as a whole. The distinction matters analytically. The New Development Bank, the bloc's equivalent of the World Bank, has approved more than $42.9 billion in loans, with an explicit strategy targeting at least 30% of operations in local currencies.

The third architecture is the most diffuse, but in many ways the most consequential — bilateral and corridor-specific de-dollarization. The Russia-China corridor is the most striking case. Both governments now report that roughly 95% of their bilateral trade settles in rubles and yuan — a figure that would have seemed implausible five years ago. Russia-India is more nuanced, and worth being careful with. The widely circulated 90% figure does not actually describe bilateral Russia-India trade. It refers to Russia's transactions with BRICS partners as a whole. The Russia-India ruble-rupee corridor is real, growing fast, but the public commentary has conflated two different statistics. Worth flagging, because the analytical conclusions diverge. India's U.S. waiver for Russian oil purchases expired on 11 April 2026, in the midst of the Iran disruption — that expiration is, I think, going to matter more than its current press coverage suggests. And Saudi Arabia has continued accepting yuan for select oil sales to China — a symbolic break with the petrodollar system that has held since 1974, even if the volumes remain modest.

Each of these initiatives, on its own, is niche. Add them up and you get a parallel financial infrastructure that simply did not exist five years ago. That is the part I want my clients to grasp first. Not aspirational. Operational.

Three Forces in Tension, Each on Its Own Timeline

Before laying out scenarios, it helps to be explicit about the forces actually at work — because they operate on completely different horizons, and the temptation to collapse them into a single trend is, in my view, the analytical mistake to avoid.

There is, first, the network effect. The depth of dollar liquidity. The sheer volume of dollar-denominated debt. The unrivaled liquidity of the U.S. Treasury market. The centrality of the dollar in commodities pricing. This force favors continued dollar dominance, and it operates on a 12 to 36 month horizon. It will not weaken meaningfully in that window. The Iran war demonstrated this in real time — when the strait closed and oil spiked, capital flowed into U.S. Treasuries despite all the structural arguments against U.S. fiscal credibility. That fact alone should give the dollar-bears a moment of pause.

Then there is the geopolitical pushback. This is the structural response of major non-aligned economies to what they perceive as the weaponization of the financial system. The horizon here is three to ten years. The mechanism is not ideological — it is mechanical. A central bank that watched $300 billion of Russia's reserves frozen in February 2022, or Iran's progressive exclusion from dollar settlement, draws conclusions independently of its political alignment. The Iran war has likely accelerated this dynamic by an order of magnitude in some capitals, particularly Riyadh and Abu Dhabi. Diversification, in that context, becomes a fiduciary duty rather than a geopolitical statement. I think this is the force most consistently underestimated by Western commentators.

The third force is the technological shift. Central bank digital currencies. Tokenized settlement. Programmable money. The horizon is five to fifteen years and the direction is, honestly, indeterminate. CBDCs could entrench dollar dominance via a digital dollar that scales globally — or they could create the technical conditions for a multi-polar settlement system. We do not yet know which. The honest answer is that the technology is neutral on outcomes; what determines the direction is the policy choices made between now and 2030, and the U.S. Senate's ongoing pushback against any Federal Reserve digital dollar adds a layer of uncertainty I had not adequately priced in earlier this year.

My reading is that the next 24 months will be dominated by Force 1. The 2030s will be shaped by the interaction of Forces 2 and 3. The window between — that is where strategic positioning gets decided. And it is shorter than most boards are planning around.

Three Scenarios for 2026–2030

Here, as in previous notes, I am stepping outside description to venture an opinion. Take it with the usual reservations. I will note that the Iran war has, in my reading, somewhat increased the probability of Scenarios 1 and 3 at the expense of Scenario 2 — though the magnitude of that shift is genuinely uncertain.

Scenario 1 — Gradual Erosion (my base case, which I put at roughly 50%)

What does Gradual Erosion actually look like in practice? The financial system slowly bifurcates, but it does not break. The dollar reserve share drifts down — not dramatically, but consistently — from 57% today to something around 50 to 52% by 2030. That is roughly a percentage point a year. mBridge grows into a real regional infrastructure for Asian and Gulf settlement, handling perhaps $200 to $400 billion annually by 2030. BRICS Pay finds operational traction on the corridors that need it most: China-Russia, China-Iran, Russia-India. It does not become a global alternative. Local-currency settlement keeps spreading among Global South corridors. The dollar remains dominant overall, but it loses marginal ground each year — and the geographies losing it fastest are exactly the ones most exposed to U.S. sanctions risk. The Iran war accelerates parts of this trajectory in Gulf-connected corridors specifically, even after the conflict resolves.

Signals to watch: IMF COFER quarterly trend, mBridge transaction volume scaling, BRICS Pay pilot launch and adoption, secondary sanctions enforcement against Chinese institutions, share of oil traded in non-USD currencies in the post-Iran-war period, gold accumulation by emerging market central banks.

Scenario 2 — Peak Dollar Persists (around 30%)

This is the comfortable scenario, and I have lowered its probability since February. I still put a non-trivial weight on it because the network effects of the dollar are genuinely formidable — the Iran war demonstrated as much. In this trajectory, the dollar reserve share holds at 55-57% through 2030. mBridge stagnates as a niche bilateral system. BRICS Pay launches but struggles with the structural problem of currency liquidity outside the renminbi. Sanctions architecture evolves but does not fragment. Each geopolitical crisis ultimately reinforces the dollar's safe-haven status, as the early days of the Iran conflict did. Trump administration tariff threats successfully deter major BRICS countries from full commitment to alternative systems. The Sell America trade of 2025 is remembered as a cyclical episode, not a structural turning point.

Signals to watch: Treasury market depth resilience, foreign holdings of U.S. debt, USD invoicing share in commodities, Federal Reserve swap line activations during stress events, BRICS Pay rollout delays, Saudi-China yuan-pricing volumes remaining modest in the post-war reset.

Scenario 3 — Bifurcated System (around 20%)

The tail scenario. I have raised its probability since February, partly because of the Iran war. I think it is mispriced by markets — not because it is likely, but because its probability is no longer trivially small, and the implications are systemic. In this trajectory, a major geopolitical rupture — most plausibly a Taiwan Strait crisis, but possibly an extended Iran-related conflict — accelerates the construction of two parallel financial systems. The dollar reserve share falls to 40-45%. The renminbi rises to 8-12%. CBDC bridges become the dominant infrastructure for non-aligned trade. Multinational corporations face genuinely dual compliance regimes — OFAC on one side, Chinese authorities on the other. Cost of capital fragments along geopolitical lines.

Triggers worth watching: A few triggers I am watching here. Taiwan Strait military activity, of course — that one needs no commentary. Whether Saudi-China oil deals start pricing in yuan at meaningful scale once the Iran-war reset settles. Whether e-CNY adoption pushes beyond the current BRICS perimeter. The possibility of U.S. secondary sanctions hitting European banks that continue to transact with Iran, which would itself be a Rubicon. A G20 country outside BRICS joining mBridge — that would be the clearest single signal. And the resolution terms of the current Iran-war ceasefire negotiations, because the architecture that emerges from those talks will tell us more than the talks themselves.

Weak Signals, Across All Three Scenarios

A few developments worth tracking closely, because each could shift the probabilities meaningfully.

Tokenization of financial assets is moving faster than most boards realize. The BIS Project Agorá, launched in 2024 with the Federal Reserve, the European Central Bank, the Bank of Japan, and the Bank of Korea, represents the Western counter-architecture to mBridge. Whether it scales matters enormously, and whether the ECB's digital euro implementation in 2025-2026 sticks to schedule will be a material signal.

Stablecoin regulation in major jurisdictions will determine whether dollar-denominated digital assets reinforce dollar dominance or, paradoxically, accelerate the technical disintermediation of the dollar from Federal Reserve oversight. The Senate's recent 84-6 vote to advance a bill blocking a Federal Reserve digital dollar through 2030 is, in my view, a more consequential development than its press coverage suggests.

On gold, the trend has been quietly remarkable. Central banks in emerging markets keep buying — 1,045 tonnes in 2024 according to the World Gold Council, the third consecutive year above 1,000 tonnes. The share of gold in official reserves has more than doubled since 2015, sitting now above 23%. Most of that move reflects price appreciation, granted, but the physical accumulation is real and consistent.

Saudi Arabia and the UAE are the case I would flag most strongly here. Both sit on the dual-system fence in ways that the Iran war has only sharpened. Both are mBridge participants. Both maintain extensive dollar reserves. Both are testing yuan-denominated commodity transactions. Their strategic ambiguity is, I think, deliberate and rational — and the war has likely shifted their internal calculation, though we will not see the consequences in published data for some time.

The IMF SDR basket review, scheduled for 2027, will be a significant marker — particularly if the renminbi share is increased meaningfully.

Brad Setser at the Council on Foreign Relations has made an observation worth dwelling on: U.S. tariff threats designed to deter de-dollarization may, paradoxically, accelerate it. That is, in my view, exactly the dynamic now playing out. A Washington that needs cooperation from BRICS-aligned central banks to manage the post-Iran-war oil reset cannot simultaneously threaten them with 100% tariffs without producing exactly the diversification it claims to want to prevent.

What This Means, Concretely, For You

I will not pretend to write a universal playbook. But a few orientations seem broadly applicable, and the Iran war has sharpened several of them.

If you sit on a board or run a treasury function: stop treating FX hedging as a tactical function buried in finance. Elevate multi-currency exposure to a board-level conversation, with stress scenarios over five to ten years rather than quarterly currency views. Map your current OFAC exposure carefully, then map your potential exposure to Chinese sanctions in a bifurcation scenario — the two compliance regimes do not overlap neatly. Invest in dual-track compliance capability now; the cost of retrofitting later, if a Taiwan crisis or further Iran escalation materializes, will be five to ten times higher than building the muscle ahead of time. And consider the operational cost of dual-currency settlement as a variable in your cost of capital, not a footnote in your treasury report. The Iran disruption has made these conversations easier to have at the board level than they were three months ago — use that political window before it closes.

If you allocate capital: revisit your assumptions about pure-play USD exposure versus a more genuinely diversified currency basket. Take a more structural view on gold, on the euro, and — selectively — on the renminbi. Use hedging instruments without apology; the era when "the dollar always works" was a viable single-currency strategy is closing, even if slowly. Broad passive USD-anchored indexes are likely to underperform in Scenario 1 relative to a more globally constructed alternative, particularly if Gradual Erosion plays out as I expect. The 2025 dollar weakness and the 2026 Iran disruption are, in my reading, related symptoms of the same structural shift — not unrelated cyclical events. This is my conviction — I could turn out to be wrong, and I will say so if the data argue the other way.

To Close

The dollar's dominance was built over eighty years. It will not unravel in eighteen months. But the mechanism that built it — its capacity to be both money and instrument — is also the mechanism now building its successors. The Iran war has not changed that mechanism. It has, in my reading, accelerated it.

Drawing on Charles Kindleberger's framing of monetary transitions, dominant reserve currencies do not typically collapse. They erode, slowly, in ways that are imperceptible quarter to quarter and structural over a decade. What we are watching is, in my reading, the early phase of exactly such an erosion — accelerated, paradoxically, by the very tools that prove dollar dominance still works. The debate that has emerged in the financial press these past weeks — Deutsche Bank arguing the Iran war marks the beginning of petroyuan dominance, Franklin Templeton dismissing the argument as overly simplistic — misses the deeper point that both responses are partially correct. The dollar is not collapsing. The alternatives are not aspirational. Both are true at the same time. The interesting analytical work is not in choosing between these positions. It is in understanding why they coexist, and what that coexistence means for capital deployed over the next decade.

The right question, in my view, is not whether the dollar will lose ground. It is how fast, in which corridors, and where your organization will find itself once the architecture has shifted enough to matter. Some institutions are already pricing this transition into their capital frameworks and treasury policies. Others are still waiting for consensus. It is no secret which camp will be better positioned when the consensus eventually arrives.

Thierry Marquez

Founder & Principal Advisor, CES Intelligence

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A note on what this is and is not: this post shares observations and readings of the current landscape, nothing more. It is not investment advice, financial advice, or legal advice, and it should not be treated as such. The data points I have drawn on come mainly from the IMF Currency Composition of Official Foreign Exchange Reserves (COFER) dataset, the Federal Reserve's 2025 update on the international role of the U.S. dollar, the Bank for International Settlements (notably the 2025 Triennial Survey), the Atlantic Council GeoEconomics Center, the Center for a New American Security (Sanctions by the Numbers 2025), the public communications of the BRICS Cross-Border Payments Initiative, and recent commentary from Deutsche Bank, Franklin Templeton, and the Council on Foreign Relations. Any errors of interpretation are mine alone.