Iran has started selling oil for euros instead of dollars, an informed source within Iran’s Oil Ministry said December 5. Is this a step toward ending the dollar’s role as the world’s reserve currency?

The Iranian switch from the dollar to the euro could be a significant blow for the dollar. As the world’s top currency, the dollar is used in the majority of global transactions. This means that nations need to keep large amounts of dollars in cash to facilitate trade. Globally, dollars account for 65 percent of foreign currency reserves. Up to now, almost all oil transactions were conducted in dollars. The resulting demand for dollars has kept the value of the dollar strong, held domestic U.S. inflation in check, and allowed the United States to get away with constantly priming its economy by simply printing more dollars.

However, if the dollar were to lose its role as the currency of trade, massive amounts of dollars could come flooding onto the open market from nations no longer needing as many dollars.

There are worrying signs that this process of moving away from the dollar has already begun.

Oil-producing countries as a whole have started reducing their dollar reserves. The Bank for International Settlements reports that dollar exposure within these countries is at the lowest level in two years—a significant development considering dollars have flooded oil-exporting nations’ coffers as the price of oil has set new highs over the last couple of years.

Russia and members of the Organization of the Petroleum Exporting Countries (opec) have cut their dollar holdings from 67 percent in the first quarter of this year to 65 percent in the second. Eighteen months ago, their dollar exposure was approximately 70 percent. Conversely, their euro holdings have increased from 20 to 22 percent.

Although a shift of a couple of percentage points may sound slight, if you consider the hundreds of billions of dollars contained within their currency reserves, even a small shift can have a dramatic impact on a currency’s valuation.

The corresponding dollar devaluation, to a 20-month low against the euro and 14-year low against the pound over this time period, illustrates the dollar’s susceptibility to foreign dollar sales, and the influence other nations play in supporting the dollar’s value.

The bigger danger for the dollar, however, is if the trend to diversify away from the dollar is picked up by other countries. That is why Iran’s and other oil producers’ decisions to sell dollar reserves is so troubling, from a U.S. perspective. As the dollar loses value, as it has over the past couple of years, other nations holding dollars see their dollar reserves losing value too. Obviously, perceived or realized dollar weakness only encourages other nations to sell their dollars before their dollar holdings become worth less.

The U.S. dollar’s day as a reserve currency may indeed be nearing an end. Trends seem to suggest the world is moving toward a system of multiple reserve bases. This is not good news for the dollar; diminished dollar demand has only one probable result for the U.S.—a falling dollar. That, consequently, means rising inflation, higher interest rates and a lower standard of living for Americans.