The United States has been the dominant power in the global financial system since the end of World War II. The dollar’s status as the world’s primary currency, its leadership of key international financial institutions, and the central role of its markets in global capital flows meant that the United States enjoyed the status of a financial hegemon.Footnote 1 In turn, US financial hegemony has long been seen as a core constituent of the liberal international order (LIO).Footnote 2 Yet recent moves by the Trump administration have prompted questions about the durability of American hegemony in an increasingly multipolar world.Footnote 3
Concerns and misgivings about US financial hegemony—particularly the role of the dollar—have persisted since the Bretton Woods era. Already in the 1960s, French finance minister Valéry Giscard d’Estaing coined the term “exorbitant privilege” to describe cheap US borrowing costs that resulted from the dollar’s reserve status.Footnote 4 In subsequent decades, events ranging from Nixon’s break with the gold standard to Japan’s economic growth and the introduction of the euro all raised questions about the future of the dollar-based global order,Footnote 5 while some countries increasingly tried to protect themselves from the recurrent crises of an increasingly financialized dollar system.Footnote 6 Debates about a potential decline in US financial power resurfaced after the 2007–2009 Global Financial Crisis (GFC);Footnote 7 Kirshner even called it an “inflection point.”Footnote 8 Yet these predictions proved premature, as US financial power visibly continued.Footnote 9 Although the crisis underscored global reliance on US crisis management, the effectiveness of the responses—particularly dollar swap lines—further entrenched US financial hegemony.Footnote 10
After decades of failed predictions about the end of dollar dominance, it may seem implausible to claim that “this time is different.”Footnote 11 Yet in 2025, the central role of the dollar in global markets—and thus US financial hegemony—appears under threat. We identify three dimensions of dollar dominance: trade and payments, reserve and safe asset status, and use for investment and funding. While past crises, like the Nixon shock or the GFC, challenged some of these dimensions and facilitated a gradual erosion at the margins of the system, the Trump administration is diminishing US financial hegemony in unprecedented ways. The undermining of the global economic order, growing fiscal deficits and continued attacks on the institutional foundations of the administrative state are fundamentally undermining global trust in the United States as the guarantor of the LIO, and thus the dollar. This incentivizes others to develop alternatives to the dollar. Existing network effects slow down this process, however, and no single alternative currency can yet replace the dollar. The result, we argue, is a financial interregnum where rising powers seek autonomy and influence without assuming hegemonic responsibility, leading to a more fragmented, multipolar financial order.
This paper proceeds as follows. The next section discusses US financial hegemony within the context of the LIO. The third section discusses the key dimensions of global dollar dominance. The fourth section reviews the cracks that emerged after the GFC that gradually eroded trust at the margins of the global financial system. The fifth section investigates how Trump is triggering a rupture in US financial hegemony. The last section discusses interregnum as the likely future of the global financial order.
US Financial Hegemony, the Dollar and the Liberal International Order
At the heart of the global financial order lies an implicit yet foundational reliance on trust—a confidence in institutions, in predictability, and above all, in the stability and impartiality of the global hegemon.Footnote 12 This logic is central to the liberal international order (LIO), in which global governance is premised on rules, transparency, and multilateral cooperation, underpinned by liberal economic principles such as open markets, private property rights, and legal predictability.Footnote 13 The US-centered global financial system mirrors the LIO: actors consent to a system that is nominally rule based because they believe the hegemon will act with restraint, predictability, and responsibility.Footnote 14
Trust is especially essential for the US dollar as the cornerstone of US financial hegemony.Footnote 15 Its centrality in the global system relies on widespread confidence that dollar-denominated claims will remain liquid, transferable, and legally secure,Footnote 16 and that the United States will uphold the norms, institutions, and legal protections essential to sustaining the system.Footnote 17 This trust and the profit opportunities it presents need to be continually maintainedFootnote 18 precisely because in a credit-based monetary system, trust serves as the foundation of money itself.Footnote 19 The state must maintain the institutional and legal structures that create trust,Footnote 20 a failure of which risks that “the whole system becomes destabilized.”Footnote 21 Deep capital markets, a reliable rule-of-law environment, and supportive monetary and fiscal policies that offer credibility regarding the currency’s stability thus act as important institutional scaffolding for a currency’s global use.Footnote 22
Trust is seen as a fundamental though often implicit dimension in the literature that discusses dollar dominance, which is often explained in terms of the responsibilities and privileges it confers onto the United States. For Charles Kindleberger, the hegemon’s key responsibility is to provide stability, notably by providing open markets, countercyclical finance, and by acting as lender of last resort.Footnote 23 The importance of decisive international crisis management to maintain trust in the existing order was on clear display during both the GFC and COVID-19.Footnote 24 Others have explored how monetary capabilities produce currency power. The dollar provides well-documented benefits to the United States, including balance-of-payments flexibility, seigniorage, and policy autonomy.Footnote 25 Dollar dominance has been important for US national security objectives, allowing the US government to borrow extensively and cheaply to accommodate dramatic increases in military spending.Footnote 26 US military allies have tended to be strong supporters of the dollar’s reserve currency role as they associate positive security externalities with America’s global military role.Footnote 27
As much of the literature recognizes, the dominance of the dollar is sustained not just by overt US leadership.Footnote 28 Susan Strange’s concept of structural power—generally understood as the ability to shape the choices other states and private actors confront in the global economy—offers an important framework for understanding the more diffuse foundations of dollar dominance.Footnote 29 The United States has long played a central role both in creating global order and accruing benefits for itself and its allies,Footnote 30 such as by establishing global financial regulations that replicate the norms and institutional framework associated with American markets and benefit actors based in, or entangled with, the US economy.Footnote 31 Consequently, certain foreign (private) actors became systematically involved in maintaining the status of the dollar.Footnote 32 Thus while the US economy constitutes a declining share of the global economy, the network structure of global finance has shown continued American centrality in global money flows,Footnote 33 with the United States occupying a preeminent role as source and destination for cross-border investment. Financial liberalizationFootnote 34 and the growth of offshore dollar marketsFootnote 35 reinforce the dollar’s global dominance.
Importantly, however, US policy can erode political support for the dollar’s global role. McDowell shows that sanctions overreach incentivizes actors to develop alternatives to the dollar.Footnote 36 We extend this argument in two ways. First, this mechanism is not confined to sanctions. A broader suite of discretionary interventions accompanied by growing geoeconomic tensions have undermined confidence in the dollar, albeit only partially and mostly at the margins of the system. Second, we argue that Trump 2.0 has facilitated a more fundamental undermining of the institutional structures that have sustained dollar dominance.
Dimensions of Dollar Dominance
While trust is the ultimate foundation of US financial hegemony, dollar dominance can be understood and measured along three dimensions of use in the global economy: trade and payments, reserve and safe asset, and investment and funding. Footnote 37
First, the dollar is central to trade and payments. Fifty-six percent of global trade is invoiced in dollars, even though the United States accounts for only about 10 percent of world trade. Key commodities like oil are priced in dollars, with strong downstream effects on other prices.Footnote 38 To settle payment flows, the global financial system heavily depends on the telecommunications network SWIFT and clearing houses like the US-based CHIPS, which clears 95 percent of USD transactions globally.Footnote 39 Because most global trade is invoiced in dollars, exchange rate movements of the dollar—rather than a country’s exchange rate with other countries—drive trade prices and volumes worldwide.Footnote 40
Second, the dollar serves as a key reserve and safe asset. Foreign central banks hold about 58 percent of their collective currency reserves in US dollars to insure their financial systems against dollar funding shortfalls or to anchor their exchange rate. For private investors, US sovereign debt serves as a benchmark and store of value during times of uncertainty. Collectively, both public and private foreign investors hold about 32 percent or USD 9 trillion of marketable US Treasury securities. In absolute terms, the rapid increase of outstanding US sovereign debt from $9 trillion in 2007 to $36 trillion in August 2025 makes foreign demand essential to financing the growing US deficit.Footnote 41
Third, the dollar dominates international investment and funding. US capital markets are the largest in the world, accounting for roughly 40 percent of both global bond and equity markets.Footnote 42 In addition, about 60 percent of all private foreign currency debt is dollar-denominated, dollar funding accounts for approximately 50 percent of all cross-border loans, and around 85 percent of all foreign exchange transactions occur against the dollar. The sheer size of American market dominance complicates any effort at diversification. This offers the United States considerable sway over crisis management: US decisions on international last-resort-lending reinforce the dominant global position of US banks while shaping the financial environment foreign states and actors need to navigate during crises.Footnote 43
These dimensions mutually reinforce each other, exerting strong network effects.Footnote 44 Since companies are linked into dollar payment chains within their own internationally integrated supply chains, banks need to be deeply embedded in global dollar markets to facilitate payments, expand dollar-denominated credit, and channel funds into dollar-denominated assets.Footnote 45 Given the prevalence of dollar activity in the system, raising funds in dollars is often cheaper than in local currency. This in turn reinforces the dollar’s use for pricing and payments, and the need for dollar-denominated investments.Footnote 46 The result is an interconnected global financial system centered on the dollar.
Yet financial hegemony is contingent. Trust is cumulative and relational, but it can also dissipate when the hegemon is seen as unpredictable or self-serving. When US policymakers impose sanctions, withhold dollar access, or politicize currency reserves, they do not just exert power—they erode trust. As the next section highlights, growing uneasiness with US financial power gradually created cracks at the margins of the system.
Cracks in the System (2009–2024)
Even though the GFC originated in the United States, it reinforced the centrality of the dollar. The Fed had shown that it would assume the role of global lender and buyer of last resort by supporting distressed global dollar markets.Footnote 47 While these interventions mostly benefited other advanced economies, the periphery of the global financial system saw itself once again confronted with a structural dependence on a monetary system whose key levers were located in Washington. For non-Western economies, various factors contributed to a growing uneasiness with US financial power: volatile spillovers from US crisis management and monetary policy,Footnote 48 disadvantages from the dollar’s commodity pricing power,Footnote 49 as well as the extraterritorial reach of US regulation/enforcement,Footnote 50 and the vulnerability of dollar-denominated reserve assets.Footnote 51 Together, these features entrenched asymmetric adjustment burdens within the global economy. This became even more prevalent as the United States increasingly instrumentalized its central position in financial markets for geostrategic purposes.Footnote 52 Trust in the dollar gradually started to erode at the margins, and many countries explored how to decrease their dollar dependence, focusing especially on their reliance on dollars as reserve assets and for payments.
China attempted to counter dollar dominance as early as 2009 when the People’s Bank of China (PBoC) proposed a “super-sovereign” reserve currency to reduce systemic risk.Footnote 53 Within months, the PBoC launched several initiatives to internationalize the renminbi (RMB), including bilateral central bank swap lines, RMB trade invoicing, offshore-RMB bond markets, and later alternative international financial institutions like the AIIB.Footnote 54
From 2012, the increasing use of financial sanctions further drove attempts to decrease dollar reliance. While India developed dedicated payment channels to bypass the dollar when buying oil from sanctioned countries,Footnote 55 China created the Cross-Border Interbank Payment System (CIPS) as a SWIFT/CHIPS alternative following sanctions against state-owned Bank of Kunlun for processing Iranian oil payments. Growing trade tensions, the CHIPS Act, and blacklistings/investment bans further accelerated efforts to strengthen financial autonomy.Footnote 56 Russia equally developed its own payment networks (SPFS/Mir). Both countries also greatly reduced their exposure to the dollar as a reserve asset. From 2013 to 2025, China almost halved its direct holdings of US Treasuries from $1.32 trillion to $756 billion, while doubling its gold holdings from 1,054t to 2,298t, whereas Russia liquidated almost all of its $96 billion in US Treasuries and increased its gold reserves from 1,015t to 2,330t.Footnote 57
The increased weaponization of the dollar system also raised questions for global oil producers, as oil has historically been paid for and held in dollars, making the petrodollar system crucial to dollar dominance.Footnote 58 In 2016, the passage of the Justice Against Sponsors of Terrorism Act (JASTA) led to several lawsuits against Saudi Arabia that could result in a seizure of Saudi assets. This episode, followed by the Khashoggi murder and resulting Magnitsky sanctions—including the asset freezing of high-ranking Saudi officials—highlighted the pitfalls of dollar reliance; as the Saudi foreign minister told US lawmakers in Washington, the kingdom might “be forced to sell up to $750 billion in treasury securities’ [if] they [were] in danger of being frozen by American courts.”Footnote 59 As a consequence, Saudi Arabia and the UAE also accelerated alternative regional payment projects.Footnote 60
Following Russia’s invasion of Ukraine in 2022, concerns about the weaponization of the dollar system became more prominent,Footnote 61 leading to more intense and widespread efforts to reduce dollar usage.Footnote 62 One such effort is mBridge—a multi-CBDC platform jointly developed by China, Thailand, Hong Kong, the United Emirates, and Saudi Arabia,Footnote 63 with the goal to enable direct exchange of tokenized currencies, removing the intermediating role of the dollar and US banks.
It also increased the political salience of the issue of dollar dominance. In China, the importance of RMB internationalization gained major political urgency,Footnote 64 while Saudi Finance Minister Mohammed Al-Jadaan stated in 2023 that the kingdom was open to settling oil trades in currencies other than the dollar. The UAE also started selling oil/gas using local currency with partners like India.Footnote 65 Driven especially by China, dollar-denominated cross-border bank lending to emerging market economies declined by almost 10 percent between 2022 and early 2024.Footnote 66
Rather than a dramatic break, the postcrisis era was marked by a partial erosion of trust that underpinned US financial hegemony at the margins of the system. From Brazil to Indonesia, broader trends toward dedollarization emerged,Footnote 67 driven by growing grievances with the US-led financial order where each use of sanctions and legal overreach has acted as an accelerant.Footnote 68 This development unfolded at the margins of the system—creating growing cracks in US financial hegemony but not yet undermining systemic trust in the dollar.
Rupture: Trump 2.0 and the End of US Exceptionalism
The second Trump administration undermines the dollar in fundamentally different ways. While previous actions were directed at individual countries, the Trump administration is eroding trust by effectively rewriting the liberal order, both domestically and internationally. The imposition of widespread tariffs, the acceptance of growing public debt/deficits, and attacks on institutions such as the Fed reflect a willingness of the US administration to make political choices that upend the existing global order and, by challenging liberal norms and institutions, undermine all three dimensions of dollar dominance.
On 2 April 2025, the Trump administration shocked the global economy with sweeping tariffs on all countries. In response, stock markets experienced the largest two-day drop in history, wiping out $6.6 trillion in wealth, while US borrowing costs spiked.Footnote 69 The immediate effects on the global role of the dollar were mixed. While equity markets recovered quickly and even showed substantial gains in the following months, driven by the ongoing boom in AI-related equities, the dollar lost approximately 11 percent in value by June 2025, the biggest decline in more than fifty years.Footnote 70 Yet the administration’s ongoing policy initiatives more broadly threaten to erode the exceptional position of the United States in global financial markets, a phenomenon Morgan Stanley termed “the Great Rebalancing.”Footnote 71
Despite the initial respite, tariffs continue to dominate the agenda. From 2.4 percent in January 2025, by August the average effective tariff rate had reached 18.6 percent, the highest level since 1933.Footnote 72 Whereas previous sanctions had targeted strategic adversaries, the imposition of broad-based tariffs is fundamentally rewriting the global trade order. From Treasury Secretary Bessent’s claim that “other countries, in essence, provide us with a sovereign wealth fund”Footnote 73 by investing for US market access, to President Trump’s suggestion that nations could “buy down tariffs,”Footnote 74 US negotiation demands are effectively breaking the American promise of a liberal economic order and turn the United States from the insurer of the global order into an extractor of benefits.Footnote 75 As Howard Marks, co-founder and co-chair of Oaktree Capital Management, put it: “All norms have been overthrown. The way world trade has operated for the past eighty years may be of little relevance to the future.”Footnote 76 In this environment, countries may not want to continue to trade in dollars.
The tariff shock also brought the sustainability of the US deficit into sharper focus. Trump’s “Big Beautiful Bill” is expected to create a yearly deficit of 7 percent of GDP, adding $2.4 trillion to the national debt over a decade.Footnote 77 The administration’s fiscal policies have raised questions about long-term debt sustainability, and policymakers from the Fed and International Monetary Fund have called for deficit reduction and debt control.Footnote 78 This prompted Moody’s to downgrade the US credit rating in May,Footnote 79 while J.P. Morgan’s Jamie Dimon warned of a “crack in the bond market.”Footnote 80 Although default risk for the United States remains low in absolute terms, it no longer compares favorably to other G7 countries. As measured by the price of credit default swaps (CDS) on five-year sovereign debt, the United States was considered to have the lowest default risk among G7 countries as recently as May 2021; by May 2025, it registered the highest risk of default.Footnote 81 Even though this perceived risk subsequently declined, by late August only Italy was considered riskier.Footnote 82 America’s exorbitant privilege is disappearing, which might lessen the dollar’s importance as a global reserve asset.
Moreover, Trump’s direct and repeated attacks on every institution of the administrative state have raised questions not only about the rule of law but also the willingness of continued US leadership in the global financial system. Trump’s threats to remove Fed Chairman Powell before his term ends in 2026 and his likely-unconstitutional firing of Fed Governor Lisa Cook have particularly raised concerns about the institutional foundations of US financial power—an important dimension of which is central bank independence as well as the Fed’s role as the world’s buyer and lender of last resort.Footnote 83 European officials now openly question the Fed’s reliability as an international partner during crises, prompting fears of a new Kindelberger trap, where no great power wants to provide global liquidity as a public good.Footnote 84 These actions are widely regarded as undermining the status of the dollar; as Esward Prasard told the Financial Times: “Trump has now declared open war on the US institutional framework, which underpins the dollar’s dominance in global finance.”Footnote 85 In response, the ECB and the Bank of England have joined countries like China in urging their banks to reduce their dollar funding gaps,Footnote 86 while the Swiss National Bank has announced that it would “allocate a significant portion of [its] dollar holdings to euros.”Footnote 87
Collectively, these developments have fundamentally altered how public and private investors view the dollar in global markets. Trust in the dollar that ensured its centrality across trade and payments, as reserve and safe asset, and as investment and funding currency was based on American restraint, predictability, and institutional integrity. While after 2009 trust had been partially eroded at the margins of the system, the actions of the Trump administration much more fundamentally upend the consensus that underpins US leadership in the LIO, marking a rupture that inherently undermines trust in the dollar—even among its closest partners. As Rogoff states, “this time really is different for the dollar.”Footnote 88
Interregnum: The Future of Global Financial Order?
US financial hegemony is ending—not through a collapse but with the start of a financial interregnum: a transitional phase where dollar dominance slowly fades without a clear successor.Footnote 89 Most states have little appetite for a financial order in which dominance is routinely leveraged for geopolitical coercion, and over the past decade, some have started to construct institutional and technical alternatives. Trump 2.0’s erratic and politicized economic policy has turbocharged these developments,Footnote 90 contributing to a systemic erosion of trust—the foundational pillar of US financial hegemony.
This transformation is perhaps most visible in the dollar’s declining role in trade and payments. Once viewed as the neutral medium for global commerce, it is now increasingly perceived as an instrument of geopolitical leverage. To reduce their vulnerabilities, states are developing alternatives. As noted by J.P. Morgan, dedollarization is most visible in commodity markets, where the dollar’s influence has reduced as “a large and growing proportion of energy is being priced in non-dollar-denominated contracts.”Footnote 91 The rise of central bank digital currencies (CBDCs) also reflects a growing ambition to rewire cross-border payments.Footnote 92 Bilateral deals or multilateral payment platforms—like China’s CIPS or the Gulf-backed Buna system—offer alternatives for conducting trade outside of dollar channels, while other countries like India are pushing the international use of their currencies.Footnote 93 Of course, global FX markets are still centered on dollar triangulation. Yet as more transactions shift to strategically safer currencies,Footnote 94 the global payments system is fragmenting—driven both by markets and by geopolitical strategy.Footnote 95
Growing concerns over US fiscal deficits are also prompting investors to diversify away from dollar-denominated assets, thereby threatening the long-standing “exorbitant privilege” of cheap borrowing. While historically in lockstep, the relationship between dollar and treasury yields has broken down, signaling a potential end of the dollar’s safe haven status.Footnote 96 Rising debt, political dysfunction, and attacks on central bank independence all undermine investor confidenceFootnote 97—and according to an FT survey, investors have yet only partially/marginally priced in these factors.Footnote 98 Some investors are already reallocating capital to Europe and East Asia, where fundamentals seem stronger or political risks lower.Footnote 99 While trust in US assets declines, a full divestment from the world’s largest capital market is unlikely—the United States after all accounts for 40 percent of global stock and bond markets. But global capital may shift from a heavily US-centered system to one focused on strategic diversification.
Finally, the reserve and safe asset function of the dollar is increasingly contested. While no currency rivals its depth and liquidity, structural pressures are driving gradual diversification. Crucially, this shift is less about a strong alternative but more about growing reluctance to remain overly dependent on US financial hegemony. But although demand for alternatives is growing, no state appears willing or able to provide a safe asset at global scale, leading to fragmented experimentation across multiple fronts. The euro may benefit, especially as Germany’s new debt issuance could create the deep sovereign bond market the Eurozone long lacked. Meanwhile, China’s renminbi is gaining traction as a tolerable complement, as perceived US–China risk asymmetries narrow—albeit trust in China’s financial system is still comparatively weak. In the absence of a credible alternative, many central banks—especially in emerging economies—are turning to gold as a politically neutral, sanction-proof store of value. Between 2017 and mid-2025, gold’s share of global reserves increased from 11 percent to 23 percent, with demand continuously rising while dollar demand is shrinking.Footnote 100 Gold accumulation has surged to new highs, not as a return to the classical gold standard, but as a response toward waning trust in the dollar.
The interregnum may thus usher in the end of financial globalization as we have known it. As systemic trust erodes and alternatives proliferate—yet none of which can replace the dollar—the logic of globally integrated, efficiency-driven markets gives way to a more fragmented financial landscape—marked by currency blocs and the gradual decline of the undisputed global financial core. Given the structural inertia of the global financial system due to existing network effects, this will be a slow process—but current trends point toward a fundamental transformation. Cross-border flows of money and capital will no longer primarily be informed by market fundamentals. What emerges is not merely a shift toward a multipolar monetary order, but the beginning of a new era of global finance defined as much by geopolitics.
Acknowledgements
We thank Niklas Kullick for research assistance. We also want to thank three anonymous reviewers as well as the IO editorial team for helpful comments and suggestions.
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