The Exit of Dollar Hegemony: A Necessary Component of the Transformation of the American Financial System and How Investors Can Navigate the “Post-Dollar Era”

05/08/2025

As Global Financial Landscape Changes, U.S. Dollar Hegemony Faces Structural Decline

Independent market analyst Lyn Alden pointed out that due to the long-term structural trade deficit of the United States, the contradiction of the dollar as a global reserve currency is gradually intensifying. This will not only trigger a transfer of monetary power but also reshape the new order of the global economy, politics, and geostrategy in the “post-dollar era.”

The Golden Age of Dollar Hegemony: How the U.S. Established Global Monetary Dominance?

Alden mentioned in a recent newsletter that since the collapse of the Bretton Woods system in 1971, the dollar has gradually replaced gold to become the core of the global economy, dominating international trade, financing, reserves, and foreign exchange markets, making it the most liquid currency globally. Specific use cases include:

International contract pricing: Many cross-border transactions are priced in dollars.
Cross-border financing: Approximately $18 trillion of non-U.S. debt is denominated in dollars.
Reserve assets: Central banks hold large amounts of U.S. Treasury bonds and other dollar assets as reserves.
Foreign exchange trading: Acting as a bridge for global currency exchanges, around 90% of foreign exchange transactions involve the dollar.

Emergence of Structural Contradictions: How Does Dollar Strength Backfire on the U.S.?

The global demand for the dollar supports its high exchange rate but weakens U.S. export competitiveness, leading to an annual trade deficit of up to $500 billion to $1 trillion. The long-term reliance on debt and money printing to maintain hegemony results in the “hollowing out of American industry” and a “fragile high-leverage structure” in the financial system:

The maintenance of dollar hegemony relies on a debt-driven financial system, where global dollar-denominated debt far exceeds the actual circulating base dollars, creating a situation akin to “20 children fighting for one chair.” This high-leverage system requires a continuously growing money supply; otherwise, it faces a liquidity crisis. Alden cites the example of the dollar shortage caused by the global trade stagnation during the COVID-19 pandemic in 2020, which forced the U.S. Federal Reserve to stabilize the market through emergency currency swaps and money printing.

Four Major Drivers of Eroding Hegemony: From Out-of-Control Deficits to Geopolitical Confrontation

Alden subsequently pointed out that dollar hegemony is gradually crumbling, with the main reasons including:

Irreversible trade deficits: Decades of U.S. trade deficits are primarily due to excessive consumption rather than productive investment, leading to economic imbalances.
Rise of domestic political populism: Wealth has shifted from the manufacturing and industrial decline of the West Coast to the financial core of the East Coast, prompting Midwestern voters to gradually lean toward the Republican Party, indicating that dissatisfaction with trade imbalances has become a mainstream political issue.
Trend of global reserve diversification: Some countries have recently tended to hold more non-dollar assets to reduce dependence on a single currency.
Decreasing effectiveness of policy tools: Trump’s attempt to reduce trade deficits with high tariffs did not address the core issue of dollar hegemony, crushing small and medium-sized enterprises and driving up the material costs needed for industrial reconstruction.

Countries’ Moves Towards “De-Dollarization”: The U.S. Faces a Dilemma

In recent years, countries have increasingly increased their holdings of non-dollar assets like gold to attempt to reduce dependence on the dollar system. Data from the Bank for International Settlements (BIS) shows that the dollar’s market share in cross-border transactions is gradually declining, while multilateral currency agreements like the Mar-a-Lago Accord are becoming new options.

For the U.S., choosing to continue consolidating dollar hegemony comes at a high cost, including diminished export competitiveness, pressure on the labor market for the lower and middle classes, exacerbated wealth inequality, and political division. On the other hand, actively weakening the dollar may stimulate manufacturing reconstruction, but the associated high inflation and low growth environment could lead to stagflation, posing risks to the future performance of U.S. financial markets:

During the economic transformation process, there could be insufficient job creation, pressure on financial assets, and increased geopolitical tensions, requiring investors to respond cautiously.

How Should Investors Respond to the “Post-Dollar Era”? Diversification and Flexibility are Key

Facing an unstable future, Alden advises investors to focus on asset allocation and risk management, including:

Allocating short-term bonds and TIPS to combat interest rate and inflation risks.
Holding neutral reserve assets like gold and Bitcoin.
Researching and trying to invest in non-U.S. stock markets, especially opportunities in emerging markets.
Regularly reviewing and adjusting investment portfolios to enhance return potential in volatile markets.

Global Economic Structure and U.S. Financial Transformation are Ongoing

Alden concludes, “The exit of dollar hegemony is a necessary part of the global economic power restructuring, symbolizing that the U.S. financial system is entering a phase of ‘long-term transformation.’

Whether choosing to maintain the status quo or move towards adjustment, the future will be filled with challenges and uncertainties. Only by responding flexibly and actively positioning can one stand firm in the post-dollar era.

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