The West Asia conflict and prospects for a multipolar monetary order

India must take a proactive stance on any alternative currency initiative, rather than remain on the sidelines

The war in West Asia has damaged not only the global economy but has also triggered significant shifts in the world’s financial and currency markets. It has accelerated a trend already noticeable over the past couple of years, of countries progressively reducing their exposure to the US dollar.

 

One of the most visible indicators of this has been a surge in gold purchases by central banks. In 2025 alone, they added a record 850 tonnes of gold to their reserves. Although this appears to have slowed lately, it continues. This has also led to gold prices ruling at nearly $5,000  per ounce, a historically unprecedented level. During past crises and wars, even those involving the US itself, the dollar and US Treasury securities, served as a haven currency. That did not happen during the latest war. There are serious doubts about the state of the US economy itself. If it raises interest rates to attract inflows into US debt, then it could worsen its already serious fiscal situation. Its current debt is $36 trillion and the cost of the war, replenishment of expended stocks of weapons, and the projected increase in defence spending will further add to the burden, as will the large tax cuts President Donald Trump has promised.

 

The US economy is perceptionally in good health because its stock markets are defying gravity. The singular reason for this is the froth generated by artificial intelligence-related securities. There is a massive amount of money being ploughed into the shares of high-tech companies, which are racing to develop ever more powerful large language models.

 

The investment is not yet justified by returns and there are increasing doubts that they will ever be. At a minimum, a massive shakeup and consolidation is expected, though one cannot predict when this might happen. What is likely is a bubble burst on a scale and of an intensity that many economists believe could lead to a global financial and economic crisis, much worse and more prolonged than the one experienced in 2007-08. During that crisis, the dollar strengthened due its safe haven status. More importantly, all major economies, both developed and developing, came together in a coordinated and collaborative response to tackle the financial crisis. The G20 of 2008 no longer exists and the US under Mr Trump will be incapable of persuading its members to shore up its economy and its currency.

 

In earlier columns, one has drawn attention to the emergence of a petro-yuan market operating out of Shanghai. China has leveraged its position as the world’s largest importer of oil to encourage oil exporters to price their exports in Chinese currency. When sanctions were levied on Russian oil exports by the US and Western countries in the wake of the Russian war on Ukraine in 2022, Russia began to use the petro-yuan market for indexing the price of oil and for settling oil transactions in yuan.

 

Since Russia is a major oil exporter, its use of the Shanghai exchange has added scale and density to the petro-yuan market. A modest percentage of Saudi oil exports to China are also paid for in yuan. Amid the West Asia war, Iran has been demanding payment for its oil exports in yuan, as well as for the “toll” it has imposed on ships traversing the Strait of Hormuz, which it now controls. It is also reported that Iran is accepting stablecoin cryptocurrency in payment. This may be the first time that a country is rejecting the dollar out of choice and not compulsion.

 

The Brics-plus group of major developing economies (the original five comprising Brazil, China, India, Russia and South Africa and the later entrants, Iran, Indonesia, Egypt, Ethiopia and the UAE) will be meeting later this year at a summit hosted by India. While Brazil, China, and Russia have encouraged the active pursuit of a Brics currency, India has been cautious, not wanting to alienate the US. Mr Trump has threatened 100 per cent tariffs on the Brics countries if they pursue “de-dollarisation”. In the changed circumstances, a multipolar currency order no longer appears unrealistic. Several Brics-plus members may well pursue a common currency with greater vigour. India should not stay on the margins of this initiative. There should be a serious debate about what would be in India’s best interests.

 

The US itself is to blame for using the international currency status of the dollar as an instrument of  economic warfare. It has encouraged countries targeted by US sanctions to seek alternative channels for financial transactions, including informal under-the-radar networks. The birth of internet-based cryptocurrency networks has proved to be both anonymous and efficient, and virtually impossible to police. Crypto wallets can be created for specific transactions and then “retired” once these are concluded.

 

Chinese economists are once again predicting a tripolar currency system, with the US dollar dominant in the Western hemisphere, the Euro in Europe, and the yuan in Asia. This is not inevitable. The yuan will expand its use as a trade settlement currency in line with China’s  continued dominance as the world’s largest trading power. But two things will hold it back from making the yuan truly international.

 

One, for political reasons, China cannot tolerate the potential volatility of its currency whose value will be determined by market forces. Without true convertibility, the yuan’s role will have clear limits.

 

Two, China’s determination to remain a manufacturing powerhouse depresses the share of consumption in its gross domestic product and makes a persistent surplus on its external account inevitable. The role of its currency in international finance has clear limits as a result. A multipolar, rather than a tripolar monetary order, is more likely in the future. 

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The author is a former foreign secretary