Why did the weaponization of the US dollar fail in the Iran War?

The Hormuz Strait crisis is revealing the internal cracks of America's most powerful geopolitical tool: weaponizing the dollar is least effective against the adversaries who most need to be pressured, and the overused sanctions system has now become a force multiplier for America's rivals.

Latest updates show that after the news of a two-week ceasefire between the US and Iran was released, risk-off sentiment faded, causing the dollar index to come under pressure. The ICE dollar index plunged by as much as 1.2%, erasing all gains for the year, while the Bloomberg Dollar Spot Index fell 0.8%—its worst single-day performance since January this year.

Media reports on the 8th stated that Iranian officials indicated they would require shipping firms to pay tanker transit fees via cryptocurrency, at a rate of $1 per barrel of crude oil transported. Previously, according to Lloyd's List Intelligence, some cargo ships have paid Iran as much as $2 million to ensure safe passage through the Strait of Hormuz.

In the view of Daniel Davies, Managing Director at Frontline Analysts and author of "The Unaccountability Machine," Iran's move toward pricing in cryptocurrency marks a structural challenge facing the dollar sanctions system. When sanctioned nations can bypass dollar clearing channels and exert actual pricing power over international shipping, the geopolitical deterrence supported by dollar hegemony is substantially weakened, with long-term implications on the global financial order that cannot be ignored.

He cites a maxim from central bankers in David Kynaston’s history of the Bank of England as a warning: "If you wish, you may brandish the big stick, but never actually use it, as it may break in your hand. It is better to raise your finger in warning." In Davies' view, the Hormuz crisis may become a historical turning point—the dollar, this big stick, is now in danger.

Two Historical Clues to Sanctions Failure

Daniel Davies traces the loosening of this logic to 2022. At that time, Russian banks were sanctioned and cut off from the SWIFT international payment system. Even then, it was widely predicted that this would be more an "inconvenience" than an "economic death sentence" for Russia; however, Russia’s ongoing war capacity and oil export revenues subsequently disappointed supporters of the sanctions.

Iran’s case is even more convincing. Daniel Davies notes Iran is one of the few countries subject to nationwide sanctions by the US Treasury, yet this has neither stopped it from continuously selling oil during conflict with the US, nor prevented it from charging "passage fees" to international shipping through the Strait of Hormuz. The existence of sanctions has not changed Iran’s actual capabilities to act.

The Internal Paradox of Dollar Weaponization

According to Daniel Davies, the root of the problem lies in a structural paradox: the deterrence of dollar sanctions comes precisely from the convenience and profitability of the dollar economic system itself. That means this weapon is most damaging to open economies deeply integrated into global supply chains—countries that are rarely actually the main targets of pressure.

Countries long subjected to sanctions are completely different; they tend to be accustomed to "making do locally" and have built alternative bypass networks. According to research by the Atlantic Council, there are also banks and shadow financial institutions willing to take the risk of US extraterritorial law enforcement and provide laundering channels for dollar payments—these trading partners are not so dependent on access to the New York dollar clearing system.

As anonymous internet payment methods become increasingly diverse, the aforementioned alternative channels are gradually becoming normalized. The US finds it difficult to completely block virtual currency transactions or digital assets pegged to real-world assets via decentralized networks, making cross-border payment flows more concealed. Ironically, because the US has imposed extremely complicated anti-money laundering compliance requirements on its allies, it has inadvertently driven sanctioned countries to accelerate into regulatory vacuums.

He draws a parallel with OPEC history: Since OPEC’s founding, its members have long known that giving users motivation to find alternatives to their products is an extremely unwise strategy. America’s excessive weaponization of the dollar system is falling into the same trap.

Daniel Davies notes that this trend had already been anticipated in academia. He and political scientist Henry Farrell—one of the co-originators of the concept of "weaponised interdependence"—jointly published a paper earlier this year with a clear exposition. They wrote: "As America continues to ramp up pressure, other countries will seek to escape dollar power, which is likely in turn to prompt America to further ramp up countermeasures."

His core judgment is: once the dollar is over-weaponized, the global financial system has shifted from being America’s geopolitical lever to becoming a force multiplier for its adversaries. The big stick may be swung, but the day it is used may be the day it breaks.

Risk warning and disclaimerThe market carries risks, and investment needs caution. This article does not constitute individual investment advice, nor does it take into account any particular investment goals, financial situations, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investing accordingly is at your own risk.