The Fragile Hegemon: How A Weakened Dollar Could Undermine US Power

The dominance of the US dollar has long underwritten America's global authority. As the world’s reserve currency, it enables Washington to borrow cheaply, impose sanctions decisively, and project influence far beyond its borders. But beneath the surface of this monetary might lies a growing vulnerability: if confidence in the dollar erodes, so too does a key pillar of US geopolitical power.

Recent shifts in global finance, diplomacy, and technology have raised legitimate questions about the durability of the dollar’s supremacy. While it remains dominant today, the trajectory is no longer assured—and the implications for the United States are far-reaching.

The Dollar: The Bedrock of American Power

The US dollar is not just a medium of exchange. It is a strategic asset, central to the functioning of the global economy and the exercise of American influence. Roughly 80% of global trade is invoiced in dollars, regardless of whether the US is a direct party. Central banks around the world hold trillions of dollars in reserves, and US Treasury bonds remain the default safe-haven asset during times of stress.

This unique position grants Washington extraordinary privileges. It can finance persistent fiscal deficits at low cost, enforce extraterritorial sanctions through control over dollar-clearing systems, and oversee a financial architecture (such as SWIFT) that embeds US oversight into the global banking system. The power of the purse and the power of the dollar are deeply intertwined.

The Erosion Begins: Structural Threats to Dollar Dominance

Yet, signs of erosion are gathering. At the geopolitical level, countries increasingly resent the dollar’s use as a tool of US statecraft. From Iran to Russia to parts of the Global South, the dollar is seen not just as a financial instrument but as a weapon—one that can freeze assets, cut access to payment systems, and impose unilateral costs. This perception is prompting moves toward de-dollarisation.

China and Russia now conduct much of their bilateral trade in yuan and rubles. The BRICS bloc has proposed exploring alternative settlement systems. Even traditional allies are exploring euro- and yen-based trade routes to reduce vulnerability to US policy shifts. The dollar is being strategically diversified against, not just economically displaced.

Meanwhile, economic fundamentals pose internal threats. The United States continues to run twin deficits—fiscal and trade—on a scale that would be unsustainable for any other country. While global demand for Treasuries has remained high, that support depends on long-standing faith in American governance, economic stability, and institutional predictability. Persistent inflation, political brinkmanship over debt ceilings, and inconsistent monetary policy chip away at that confidence.

Technological change also presents a structural challenge. Central bank digital currencies (CBDCs), blockchain-based payment systems, and decentralized finance all offer ways to bypass traditional dollar-based rails. If emerging markets adopt these technologies to avoid dollar exposure, US influence over global capital flows could decline materially.

Consequences: What the US Stands to Lose

Should the dollar’s role diminish significantly, the consequences for the United States would be profound.

Global influence would wane. The ability to impose financial sanctions would be diluted if rival systems can operate beyond the reach of dollar-clearing networks. The US Treasury’s leverage over adversarial regimes—and occasionally allies—relies on the ubiquity of the dollar. If alternatives become viable, US tools of statecraft lose potency.

The cost of capital would rise. Without reserve currency status, the US would likely pay more to finance its national debt. Foreign buyers might demand higher yields, while domestic markets could become more sensitive to fiscal imbalances. The assumption that the US can always find demand for its debt at reasonable rates would no longer hold.

Markets and politics would become more fragile. Dollar strength has historically given the US a cushion—against oil shocks, financial panics, and external crises. A dented dollar reduces that resilience. Domestic politics may also grow more short-termist as policymakers respond to market volatility with reactive, populist decisions, especially if bond markets or currencies begin to reflect diminished investor confidence.

Reliance on foreign goodwill would grow. The US would need to maintain the confidence of external lenders to stabilize the dollar, manage inflation expectations, and support capital inflows. That means Washington would be less able to afford diplomatic missteps, trade disputes, or isolationist stances without risking economic consequences.

Can the US Reassert Dollar Strength?

The United States still has tools at its disposal to maintain dollar dominance—but it requires proactive effort. Credible fiscal policy is key. That means addressing debt growth, rebuilding bipartisan support for budgetary discipline, and avoiding repeated political crises over spending and borrowing limits.

Monetary stability matters too. A coherent and predictable Federal Reserve policy framework reinforces global faith in the dollar, especially in contrast to more volatile currencies.

Perhaps most importantly, America must rebuild multilateral trust. That includes showing consistency in international agreements, avoiding arbitrary uses of financial coercion, and engaging cooperatively in global financial forums. Strategic restraint may preserve the dollar’s role more effectively than aggressive assertion.

Modernizing payment infrastructure could also play a defensive role. By adopting real-time payments, exploring a digital dollar, and integrating blockchain technologies into regulated finance, the US could maintain its edge in financial innovation and infrastructure reliability.

However, none of these measures guarantee preservation of dollar hegemony. The structural momentum behind global diversification is strong, and even a reduced—but still prominent—role for the dollar would require adaptation across US fiscal, monetary, and diplomatic policy.

Conclusion: The Illusion of Permanence

The dominance of the dollar has long been treated as an immutable fact of international economics. But its endurance has always depended on trust—trust in US institutions, in the stability of its economy, and in the rules-based global order it has championed.

As that trust frays, the US risks finding itself in a world where the privileges it once took for granted must be earned anew—or lost. A weakened dollar is more than a financial inconvenience. It would reshape America’s place in the world, eroding its leverage, narrowing its choices, and exposing it to vulnerabilities long masked by monetary dominance.

If Washington wishes to avoid becoming a fragile hegemon, it must recognize that the dollar’s strength is not guaranteed—and that the cost of neglecting it could be the very power it has long underwritten.

Author: Ricardo Goulart