War, tariff volatility, and shifting capital flows challenge the global currency order—even as markets prove resilient.
When Japan’s largest automaker reported 2025 results last May, it said its earnings were hit by $4.6 billion in foreign-exchange losses due to the US dollar’s decline. This month, Toyota has a new concern: the war in Iran that has spread throughout the Persian Gulf. The company sold 325,000 cars to the region in 2025, but the fighting and the closure of shipping lanes through the Strait of Hormuz could further decrease earnings.
Even more damaging, the company is forecasting a roughly $9.6 billion drag on earnings in 2026 due to President Trump’s on-again, off-again tariffs. “The impact of US tariffs,” Toyota CFO Kenta Kon said, “is a significant rise from our initial forecasts.”
The global economy entered 2026 already on shaky ground. The Trump administration’s sweeping tariff policies weakened the dollar and heightened trade fears, while a Supreme Court decision on those tariffs added fresh uncertainty, even as inflation was slowly easing. Then, on February 28, US and Israeli forces launched strikes on Iran, oil prices surged, and the dollar bounced higher in a flight to safety.
The Strait of Hormuz, which carries about 20% of global oil and LNG exports, effectively closed after Iranian threats and tanker attacks, sending oil prices from about $70 to more than $110 a barrel within days. Oil-import-dependent economies such as Japan, South Korea and China were especially vulnerable to the war’s aftershocks.
Higher oil prices. Uncertainty about tariffs. The dollar boomerang. Corporate finance executives face a new series of challenges: Higher oil prices, etc. However, despite short-term headwinds for business, global analysts remain relatively optimistic about the long-term economic outlook, even with the war’s sudden shadow over markets.
While energy concerns increased as war clouds gathered over the Persian Gulf, analysts largely believed that the global economy would revert to a pattern similar to the pre-war period: a gradually declining dollar, reduced foreign investment in US assets, and inflation that persistently prevents central banks from lowering interest rates. A key sign of market consensus was that, by mid-March, the forward price of oil for October delivery was $79 per barrel, compared to its temporary $110 spike after the war began. But the uncertainty surrounding the objectives and duration of the attacks on Iran by the US and Israel has kept oil prices bouncing around $100 per barrel.
Aside from the currency issue, several factors have contributed to relatively positive economic forecasts despite the fighting in the Gulf. The Trump administration maintains, despite its forecast having been extended, that the disruption to energy supplies will be relatively short-lived. “You’re seeing a little bit of a fear premium in the marketplace, but the world is not short of oil or natural gas,” said Energy Secretary Chris Wright on CNBC in early March. “Worst case is a few weeks, not months.”
As Dollar Falters, China Moves In
The dollar had a tough year in 2025, dropping about 12% against a basket of other major currencies. Although US administrations usually support a strong dollar, President Donald Trump broke that tradition and said it was “great” that the dollar was falling on global markets, which caused it to tumble even more.
The dollar’s decline triggered a significant shift into gold, which increased in value by 60% in 2025, reaching a record price of $5,110 per ounce. European stocks saw their largest inflows ever in February as investors moved away from the United States.
Marc Chandler, chief market strategist at Bannockburn Global Forex, said that for much of 2025, foreign investors had been buying US equities while shorting the dollar as a hedge. “Now that US equities are declining, they have to buy back their short-dollar hedge,” Chandler said. “I’m not convinced that what we’re seeing in the dollar is much more than unwinding positions, rather than people flocking to the US as a safe haven.”
Mark Sobel, former head of international finance at the US Treasury, wrote in a March 2025 op-ed for the Financial Times that the dollar’s dominance was slowly eroding. “Like termites eating away at a house’s woodwork, Trump’s dysfunctional policies are eating away at its support and rendering the US currency acutely vulnerable to future shocks,” Sobel said.
A weaker dollar is not just a market story—it is reshaping currency dynamics globally, with China at the center. The Chinese government intervened on February 27 to stop the renminbi’s appreciation against the dollar, which had increased by 7% since last April. The People’s Bank of China (PBOC) announced it would eliminate the 20% reserve requirement on foreign exchange forward contracts and stated it would keep the renminbi’s exchange rate at a “reasonable and balanced level.” The higher value of the renminbi did not hurt Chinese exports—the country recorded a $1.2 trillion trade surplus in 2025.
China’s government has used the weaker dollar to strengthen the renminbi’s role in trade finance and payments, with officials claiming the currency is now the world’s largest trade-finance currency. Chinese companies have been gradually decreasing dollar transactions. The dollar’s share of cross-border transfers has dropped from 80% in 2010 to about 40% in 2025, mainly due to increased renminbi flows. The renminbi’s share of global trade has grown from 2% in 2021 to over 7%, a notable rise but still not enough to threaten the dollar’s dominant position in world trade.
In Japan, as inflation rises, the Bank of Japan is expected to increase interest rates, according to Mitsubishi UFJ Financial Group. While the Federal Reserve in the US has kept rates steady through its mid-March meeting. The BOJ’s move to tighten policy after ending its negative interest rate policy is seen as a factor aiding yen appreciation.
Europe has been significantly affected by the rise of the euro, which appreciated nearly 12% against the dollar in 2025. “I have watched the dollar rate with concern for some time,” German Chancellor Friedrich Merz said. “The dollar course is a considerable extra burden for the German export economy.” Dirk Jandura, head of the BGA, Germany’s wholesale and foreign trade association, said the strength of the euro was causing exporters “great concern.” The dollar’s easing, though, has softened some of that impact.
Economy Shows Resilience
Supporting the Trump administration’s more optimistic oil outlook, the International Energy Agency agreed in early March to release 400 million barrels of oil to address the supply disruption—the largest such action in the organization’s history. The move reinforced officials’ view that any price spike would likely be short-lived, lasting weeks rather than months. The 32 member countries still have about 1.4 billion barrels of emergency reserves that can be tapped if the shortage worsens.
“The rise in crude oil prices to date does not represent a shock of the magnitude seen in earlier episodes,” said J.P. Morgan analysts Bruce Kasman and Nora Szentivanyi. “At [about] $100 a barrel, Brent crude is less than 35% above its two-year trailing average. To deliver a shock similar in size to the Russian invasion, crude oil prices would need to move close to $150 and remain at this elevated level for several months.”
Joe DeLaura, an energy analyst at Rabobank in the Netherlands, urged companies to have a plan in place to make quick decisions involving their energy supplies. “Start assessing your supply chains and your access to capital markets,” DeLuca told a webinar in March. “Are you shoring up relationships? Are you able to have critical redundancy in your supply chains, especially for key inputs like energy? One of the ways to take advantage of this is by looking further out on the curve and take advantage of volatility when it swings in your favor.”
Unlike in 1973, when a Middle East oil embargo caused inflation to soar, the United States now exports both petroleum and liquefied natural gas. Therefore, the war is unlikely to significantly impact the US economy in 2026, as it would require a “very severe scenario” for US economic growth to contract, according to Oxford Economics. “We have a view that the US dollar is going to broadly continue to somewhat weaken,” said Daniel Moseley, associate director for scenarios and macro modeling, at Oxford Economics.
Asia Hit Hard
The Iran War most heavily affects Asia. According to the US Energy Information Administration, 84% of crude oil and 83% of LNG travels to the region. I would also say war in Iran. China, India, Japan, and South Korea are the leading destinations for Persian Gulf crude oil, but Thailand and Vietnam also rely heavily on imported energy.
Companies like Toyota have limited options but to cut costs. One strategy is localizing their supply chains. The company announced in February that it plans to invest $10 billion in the US over the next five years to increase production of its most valuable hybrids. It is also reducing production of lower-value models and stated it will implement three price hikes in 2026 to compensate for the “double whammy” of a weaker dollar and US tariffs.
Rajiv Biswas, CEO of Asia-Pacific Economics in Singapore, states that a major concern in Asia is that a prolonged energy shortage could lead to a surge in inflation, prompting central banks to increase interest rates. China’s government, for instance, ordered refiners to halt diesel exports, seemingly worried that supplies could run low during a lengthy conflict.
Biswas stated that the Persian Gulf is also a major shipping route for urea and sulfur used in fertilizer production. This means “the agricultural sectors of many Asian developing countries could also be hit by lack of essential inputs,” as well as the US, right as the Spring planting season begins. Additionally, Brazil, the world’s leading soybean producer, imports most of its urea from Qatar and Iran. India depends on Saudi phosphate exports.
Europe Needs To Urgently Use AI
No European industry was more affected by the dollar’s rise than automobile manufacturing. At luxury carmaker BMW, for instance, revenues fell 5.9%, with half of the decline attributable to the strength of the euro, which created a $670 million headwind. Additionally, US tariffs reduced earnings and imports from China and limited sales to Europe.
“If you take all these elements together, the headwind is bigger than the tailwind, which we’re working on,” BMW CFO Walter Mertl said. He added that the company had cut costs by $2.6 billion to boost profitability. “We are working on all cost elements,” Mertl said, including capital expenditures, research and development spending, and sales and general expenses.
To hedge against a weakened dollar that makes their exports more expensive, European companies need to do more than cut costs. These companies need to invest urgently in cutting-edge technologies, such as artificial intelligence, to make them more competitive in the global marketplace, says Marcello Messori, a professor at the Schuman Centre of the European University Institute in Milan.
“Europe needs to look at artificial intelligence and how it is compatible with the green transition and try to exploit these specific sectors,” Messori says. “Between the current European specialization in mature technologies and the technological frontier, there are a lot of opportunities that you can exploit between those extremes.”
One company leading this approach is Siemens, once known for low-profit industrial machinery. CEO Roland Busch stated that the company has strong growth prospects because it has focused on adopting new technology. “We are in a good place because we are offering what the world needs,” Busch said. “We are positioned along secular growth drivers: automation, digitalization, electrification, sustainability, and artificial intelligence.”
Messori emphasizes that the European Union must speed up efforts to unify financial markets to create a larger pool of venture capital. He notes that Sweden boasts a thriving startup economy. However, established companies often relocate quickly to the US, where capital markets are more accessible.
While the results of wars rarely match initial predictions, the consensus among analysts is that by year’s end, the Iran war may be seen as an economic distraction rather than a strategic turning point. The forces that defined markets before the conflict—moderating inflation, steady demand, and resilient consumer spending—are expected to keep the global economy on track. The dollar, meanwhile, is likely to remain volatile but broadly weaker over time, as structural pressures and shifting capital flows continue to test its dominance.