The United States has halted air shipments of U.S. dollars to Iraq, withholding funds generated from the country’s oil sales as part of a campaign aimed at pressuring Baghdad to reduce its ties with Iran. The suspension, confirmed by senior Iraqi officials, marks an intensification of U.S. efforts amid ongoing tensions linked to the conflict between Washington and Tehran.

Since early February, planes transporting physical cash to Iraq have been grounded. Officials indicate that the initial halt was due to the closure of Iraqi airspace following the escalation of war-related activities near Iran. However, the suspension continued even after the reopening of Iraqi airspace in April, coinciding with a drone attack near U.S. diplomats at Baghdad’s airport. Washington reportedly intended the move to curb the smuggling activities of Iran-aligned militias within Iraq and to signal increased pressure on Baghdad to rein in these groups.

The United States has also suspended cooperation and funding for Iraqi security forces, further straining bilateral relations. These measures come amid a series of attacks claimed by Iran-backed militias in Iraq targeting U.S. interests, including the U.S. Embassy, as retaliation for American and Israeli operations against Iran.

Iraq finds itself caught between its longstanding relationships with both Iran and the United States. The current U.S. actions have raised concerns over the stability of Iraq’s economy, which is heavily cash-dependent and relies on U.S. dollars derived from oil exports. Iraq’s central bank processes daily dollar transfers through its account at the Federal Reserve Bank of New York to facilitate imports. Cash shipments by air have traditionally supplemented electronic transfers to meet domestic demand.

Economic advisers to Prime Minister Mohammed Shia al-Sudani have downplayed the impact of the suspension, estimating that physical dollar shipments represent only about 5 percent of Iraq’s dollar demand, primarily for individuals traveling abroad. The majority of transactions continue through banking channels without significant disruption.

Analysts offer differing views on the broader economic implications. Ahmed Tabaqchali, a senior fellow with an international affairs research organization, acknowledged the move as a negative development but suggested its effect would be limited due to the predominance of internal transactions in Iraqi dinars and the increasing use of electronic payment methods. Others warn that restricting dollar flow constitutes a "nuclear option" that threatens to destabilize Iraq’s fragile economy and complicate relations with other regional oil producers.

The U.S. government’s actions also reflect broader political aims, including influencing the formation of Iraq’s next government. Earlier this year, President Donald Trump threatened to withdraw U.S. support should Shiite politician Nuri Kamal al-Maliki return as prime minister, citing his alleged alignment with Tehran. Al-Maliki and other Iraqi officials have condemned what they describe as unwarranted American interference.

Meanwhile, ongoing blockades on the Strait of Hormuz, a crucial export route for Iraqi oil, have further tightened pressure on Baghdad’s economy, highlighting the complex financial and political challenges facing Iraq amid U.S.-Iran hostilities and regional instability.