Reflections on the Latest Middle Eastern War and How the Dollar Might Be Impacted
March 2, 2026
The initial currency market reaction in these early days of the war between Iran on the one hand and the U.S. and Israel on the other has been favorable to the dollar, which is attracting funds looking for financial safety. Without knowing how the conflict will evolve militarily and politically, one can imagine momentum shifting especially if fighting persists, as for instance happened in the four-year-long and counting war between Ukraine and Russia. The United States has a long history of military involvements in the Middle East and in most has experienced quick military success. Limiting secondary economic dislocation from higher oil prices, or establishing a stable political atmosphere afterward has been a different matter altogether.
Even without a U.S. conscription draft, voter tolerance for extended military ventures tires sooner or later. Johnson’s presidency was done in by the Vietnam War’s mounting unpopularity. Nixon took over four more years to get past that war and was then powerless to prevent the OPEC cartel from quadrupling oil prices early in 1974. By the time Nixon’s second term ended with Ford then at the helm, Vietnam was lost anyway. Carter’s chances of getting reelected was already iffy in 1979 due to inflation that got a particular boost from a second oil price leap early in 1979 after the Iranian revolution. Reelection became even more doomed when the U.S. embassy in Iran was seized and staff there were taken hostage. His image wasn’t helped when a mission to free the hostages failed. The bombing of U.S. marine barracks in Beirut happened on Reagan’s watch, and although Operation Desert Storm during the Bush41 presidency got Iraq out of Kuwait, the venture failed to accomplish any useful long-term goal. Clinton managed to serve two terms partly by avoiding to get involved directly in a Middle Eastern military conflict. Bush43 effort to rid Afghanistan of Taliban rule likewise won the initial challenge but was unfit for handling the long-term challenges of nation-building. Obama made red line promises he couldn’t keep, and Biden paid the political price of walking away from a military commitment in the Middle East that then went quickly awry.
With all this bad history, it’s a gamble at best that Trump’s war will end well for the United States both in the short and long run. U.S. wartime experiences that have ended well for the country haven’t been as kind for presiding U.S. presidents. Lincoln was killed less than a week after the civil war ended. Wilson suffered a severely incapacitating stroke less than a year after the armistice ending World War I, and FDR died in his early sixties a few months before the end of the Second World War from a cerebral hemorrhage.
Suppose, nevertheless, that the current U.S. war is won in comparatively short order and followed by a political change in Iran that proves stable and ushers in a better life socially and economically for the Iranian people without a continuing U.S. obligation to keep the peace there. From a different vantage point, one can foresee a way that this chapter could evolve into a period greater currency market volatility. The renaming of the U.S. Department of Defense as the Department of War has turned out to be far less a matter of semantics that perceived originally. The Trump Administration is not taking a reactive approach to military engagements. The image around the world regarding boundaries of U.S. foreign policy had already undergone pronounced reassessment before this week’s war began. The fresh understanding of what Washington can be counted on to do, both positive and negative, represents a very large departure from even what had been perceived at the start of 2026.
It is not an exaggeration to consider this reassessment on the scale of an altogether different but equally significant change that happened to the international monetary system around 50 years ago. That earlier shift was associated with many years of out-sized currency market swings. Dollar devaluations in December 1971 and February 1973 gave way to flexible, market-determined currency relationships. But the changes that followed didn’t happen all in unison. Currency market intervention continued, with different countries settling on different rules determining if and how much to buy or sell foreign exchange with the intent of influencing currency values. At first, the United States ruled out intervention altogether but by July 1973 modified that absolutism for a set of subjective conditions defining what constitutes disorderly forex market conditions that would warrant intervention. This period over two decades before the creation of the euro happened in an era of many European currencies, and the governments of many of them agreed to keep intervening on a regular basis to maintain narrow trading corridors around fixed parities between their own respective currencies.
As policy-makers and investors groped their way through this ongoing evolution of the international monetary system, much bigger dollar swings occurred than what have been experienced in more recent years. Fifty years ago in the roughly six months between end-January and end-July of 1976, the Italian lira, British pound and French franc declined respectively against the dollar by roughly 20%, 14%, and 8%. Sterling’s instance is particularly instructive. Before the dollar emerged as the hegemon currency, the pound had claimed that advantage. When flexible dollar rates were introduced early in 1973, the pound was at $2.40, and there had been little net change over the two ensuing years. After then easing in the second half of 1975, sterling stabilized and held its ground somewhat above $2.00. But after falling through that psychological level, on March 6, 1976, sterling went into a tailspin that depressed it around 15% in the space of three months to 1.70 by early June. More trauma ensued in the second half of the year, leading Britain to get a then huge loan of $3.9 billion from the IMF.
This history leaves one with two takeaways. Profound changes in a landscape previously taken for granted (a change from fixed to flexible dollar rates) can be messy for financial markets. Secondly, it’s not easy for a lynchpin currency to assume a downgraded role in an international monetary system that moves on to a different arrangement.
Copyright 2026, Larry Greenberg. All rights reserved.
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