Has the Iran war damaged US economic credibility?

THE evidence from 2026 tells a more nuanced story than a simple binary of “damaged” or “undamaged”.

It points to a currency and an economy under strain, propped up less by intrinsic strength than by the absence of better alternatives.

The war, which started on Feb 28, has visibly weighed on the real economy.

While the US’ gross domestic product had already slowed sharply in late 2025 – the economy grew at a tepid annualised pace of 1.4 per cent in Q4, down from 4.4 per cent in Q3 – the conflict has added fresh drag.

Forecasters have marked down 2026 growth expectations accordingly.

Economic experts project that the war could shave 0.3 percentage point off the country’s GDP in 2026, with growth slowing to 1.8 per cent from 2.1 per cent in 2025.

Consumers are feeling it directly: Petrol prices have risen more than US$1 a gallon since the conflict began.

Perhaps more corrosive to credibility, the economic burden has not been evenly shared. Spending has stayed resilient mainly because higher-income households, who hold more stock market wealth, have kept consuming even as the broader drag continues.

At the same time, economists also warned that the deeper risk was not the war itself, but the uncertainty layered on top of the Trump administration’s tariff policy, an increasingly assertive foreign policy and domestic fiscal pressures.

Whether inflation is temporary and how much conditions will squeeze the consumers who drive most US growth are key open questions.

In the longer term, some analysts see the war reviving genuine doubts about US dollar dominance.

Questions about whether the euro, gold or digital assets could serve as alternative reserve assets have resurfaced amid concerns about unpredictability on trade, geopolitics and fiscal policy.

Yet, counter-intuitively, the war has, if anything, reinforced the US dollar’s safe-haven role rather than eroded it.

Since the war began, the greenback has been the primary asset providing genuine safe-haven protection for global equities. Gold, the Swiss franc, the Japanese yen and government bonds have all stumbled.

Foreign appetite for US debt has held up too: Even as China trimmed its Treasury holdings, Japan and Britain kept buying, suggesting sustained underlying confidence in US assets.

Structural advantages still matter more than headlines. The US dollar’s position rests on the size of the US economy, the depth of its markets and institutional credibility – pillars no rival currency can currently replicate, since building comparable infrastructure would take decades.

Call US economic credibility strained, not broken. The war has exposed real vulnerabilities: slower growth, uneven consumer pain, the US Federal Reserve navigating fiscal and political pressure, and a fresh round of “Is the US dollar’s reign ending” commentary.

But the markets have not voted with their feet. The US dollar’s resilience during this crisis actually mirrors 2022’s Ukraine shock: Geopolitical shocks with inflationary consequences now systematically override the traditional flight-to-safety mechanics that once favoured other havens.

Still, that is less a triumphant reaffirmation of US credibility than a reminder that the alternatives are worse.

The US’ economic credibility has survived this war intact, but it was tested, and the fault lines it revealed – including fiscal strain, political pressure on the Fed and uneven economic gains – will outlast the conflict ceasefire.