US Bombing of Iran’s Nuclear Sites: The First Major ‘Crash Test’ for the Dollar and Euro?

Undoubtedly, the US decision to undertake immediate military intervention in Iran has altered the balance of power on the international geopolitical chessboard. It has created a significant dilemma for Iran’s leadership regarding how to respond, including potentially using the Strait of Hormuz to disrupt oil flow. However, it also raises critical geopolitical and economic questions. In the context of the new geopolitical situation—referred to by some analysts as ‘systemic instability’—a major question arises about what China and Russia will do regarding Iran under this new scenario. At the core of the Brzezinski Doctrine, which underpins NATO’s strategy of continuous eastward expansion, is the goal of breaking the triangle between Russia, China, and Iran. The US decision to bomb Iran’s nuclear sites aligns with this doctrine. But what will China and Russia do? If Iran decides to respond in a way that affects the free flow of ‘black gold’ from the Gulf, the stakes rise significantly. The Trump administration’s move to strike Iran also poses the most significant question yet for the dollar and its role in the international monetary system. The dollar, representing global economic hegemony since World War II based on the Bretton Woods agreements, became the tool for post-war reconstruction. This was possible due to the US’s post-war geopolitical power and the stable convertibility of the dollar to gold. However, in August 1971, Nixon ended this relationship, removing the gold guarantee from the dollar unilaterally. What followed was a tumultuous decade marked by oil crises, recessions, inflation, exchange rate turmoil, and major political and geopolitical conflicts. The dollar faced repeated devaluations until drastic measures by Paul Volcker (Fed) in 1980-81 stabilized it at great cost to the economy. Since then, supported not by gold but by demand created through US public debt and exclusive oil trade in dollars, the dollar regained international value. Today, amid inflation, pandemics, geopolitical fractures, and trade wars, the dollar’s viability is questioned. Trump exacerbated these issues; the dollar has steadily declined by 10% this year and faces challenges from all sides. The real decline of the dollar isn’t visible in exchange rates but in its value against gold. Central banks are buying physical gold at an unprecedented rate, replacing foreign reserves held in currencies, especially the dollar. This trend is strongest among BRICS nations and intensifies in Europe. The current crisis following US intervention in Iran creates a historic shift toward ‘safety’ in capital management. Previously, crises led to a flight to the dollar and US bonds. Now, we see a shift toward gold first. Will the dollar follow? Markets will reveal if this signals a larger crisis akin to the 1970s or if the king dollar remains viable amidst Trump’s bombings. As for the euro, it doesn’t fare much better. Its position in the international monetary system isn’t among genuine currencies, as it doesn’t represent a single fiscal entity but a fragmented group of economies. The ECB struggles to maintain unity during crises like the debt crisis, pandemic, or inflation. Lagarde herself has admitted the biggest risk for the Eurozone is the fragmentation of the euro-bond market, highlighting the euro’s unique vulnerabilities.