https://newleftreview.org/sidecar/posts/staying-power
Ho-fung Hung
05 June 2026 Economics

Every time the global economy plunges into turmoil, talk of the coming end of dollar hegemony resurfaces. In March 1978 – in the wake of the collapse of the Bretton Woods system and amid stagflation in the United States – the New York Times published an op-ed by Soviet economist Stanislav M. Menshikov, ‘A Marxist Look at the Dollar Crisis’. Accompanied by a cartoon of a bear in Red Army uniform examining a dollar bill with a magnifying glass, the article proclaimed that the contradictions and crises of US monopoly capitalism were bringing the dollar’s global dominance to an end, and that major economies had begun to move towards gold and more secure currencies as stores of value.

The 2008 financial crisis, Russia’s invasion of Ukraine, Trump’s tariffs and threats to invade US allies, and the ongoing war with Iran have all inspired similar predictions that the world’s patience with the postwar monetary order is running out. It seems logical that no major players in the world economy would want to remain dependent on the currency of an erratic power for its trade and savings. The US dollar’s status as a fiat currency – it has not been backed by any precious metal since Nixon ended the dollar’s gold convertibility in 1971 – has long been viewed as fragile, given the United States’s deteriorating current-account and fiscal deficits. Yet the dollar remains the most widely used currency in global trade and finance, with the euro a distant second. Although China has become the second-largest economy and ‘workshop of the world’, international use of the Renminbi remains tiny by comparison, trailing far behind even the British pound and Japanese yen – disappointing those who argue that the RMB is on the verge of becoming the next hegemonic currency.

The global dominance of the dollar has given the United States the ‘exorbitant privilege’ of borrowing in its own currency from around the world. Theoretically, the US cannot default, as Washington can always print more money to service and repay its debt. It can purchase products and services from around the world with dollars it generates out of thin air, without needing to offer an equivalent amount of products and services in return. No other country could sustain fiscal and trade deficits on this scale without facing bankruptcy. At the same time, all countries that depend on the dollar are at the mercy of US interest rate fluctuations, particularly developing countries. The 1979 Volcker shock, which hiked rates to more than 20 per cent and triggered an international debt crisis, offered a painful illustration of the dangers of dollar dependency. Yet despite periodic eruptions of discontent, the dollar has been hegemonic as a fiat currency (1971–2026) for more than twice as long as the period when its hegemony was backed by gold (1945–1971).

What sustains this hegemony, under what circumstances might it end, and what might come after it? Mainstream economists tend to focus on ‘network externalities’ or bandwagon effects to explain the persistence of the dollar system. Because most nations and companies rely on dollars, it is difficult for any single actor to break away and begin using another currency. The economic literature also emphasizes the unparalleled depth, institutional sophistication and stability of dollar asset markets. Yet if these factors sufficed to maintain a currency’s hegemony, then the era of the British pound’s hegemony would not have ended. At the close of the Second World War, sterling was still the leading currency, even though the Bretton Woods Conference in 1944 had already established an international monetary system anchored on the dollar, with a $35-to-one-ounce gold fixed convertibility. The British Empire retained control over vast territories, many of which were tied to its currency. In 1947, nearly 90 per cent of the world’s foreign exchange assets were still in sterling. However, as the British Empire disintegrated, sterling hegemony rapidly crumbled as companies and countries – including newly independent former British colonies and protectorates – shifted to the dollar. London remained a leading financial centre, but the city’s banks converted their pound sterling business into dollar business. In fact, the rise of London as an offshore dollar centre helped propel the dollar to global dominance.

The dollar’s staying power cannot therefore rest solely on its incumbent advantage and the depth of dollar financial markets in New York. Institutional factors and existing preferences in private finance do matter in ordinary times. But during moments of crisis, US military power has often come into play. My research demonstrates how a key pillar of the global dollar system since the end of the Second World War has been the security umbrella that the United States provides to most wealthy capitalist economies (Europe and Japan) and commodity producers (notably Middle Eastern oil exporters). With the world’s largest arms-exporting apparatus and most extensive network of bases, the US ensures that its allies maintain large reserves of USD assets and conduct their trade in dollars in exchange for protection. Dependence on the US for defence – based on a country’s purchases of American arms and the presence of American troops on its soil – is highly correlated with ownership of US Treasury bonds, as well as other dollar assets. Under what I call the dollar-security nexus, the wealthiest capitalist countries and leading oil exporters have stayed closely tied to the dollar system. This arrangement means that other countries seeking to access those markets or energy supplies must also use the dollar.

Since the height of the Cold War, major economic players have occasionally attempted to diversify their reserve holdings and conduct trade in other currencies. West Germany, for example, began exchanging its dollar reserves for gold amid the deterioration of the US balance of payments in the late 1950s. Arab oil producers considered invoicing their oil exports in a basket of currencies in the 1970s. At the turn of the 2000s, Saddam Hussein’s Iraq began denominating UN Oil-for-Food sales in euros rather than dollars. In each case, Washington resorted to military leverage – whether through inducement, coercion or outright invasion – to bring these countries back into the fold.

Of course, the resilience of dollar hegemony does not guarantee its permanence. Since 2000, although a majority of US Treasuries held globally remain in countries that are militarily dependent on the United States, an increasing share have migrated into accounts in offshore financial centres such as the Cayman Islands, as well as to China, the first major power that is not only independent of Washington’s security umbrella but a geopolitical rival. This erosion of the dollar-security nexus – compounded by mounting US fiscal and current-account deficits – could have triggered a global transition away from the currency. Yet, so far, this has not materialized. Instead, we have witnessed a consolidation of the dollar’s grip on the global economy in the wake of successive crises, including those originating in the United States itself.

One important reason for this stalled transition is the lack of a viable alternative. The euro’s design flaws, in particular the lack of centralized fiscal and political authority, have constrained its use outside Europe. The Renminbi appears a more plausible candidate. As the largest economy outside the US security umbrella, China is certainly in the strongest global position to challenge dollar hegemony. Promoting the international use of the RMB has been a stated objective of Chinese policymakers since the 2008 global financial crisis. However, the Chinese Communist Party has remained vigilant against financial openness, maintaining a strict capital-control regime to prevent capital flight. This has prevented the RMB from becoming freely convertible, suppressing global demand for the currency. Because of the RMB’s inconvertibility, its holders, including Russia – which has conducted much of its trade with China in RMB since being pushed out of the dollar system by US sanctions – must find costly and often opaque ways to convert RMB into what Russian central bank reports call ‘currencies of unfriendly states’ (that is, USD and other Western currencies). Many orthodox economists and IMF officials assumed that China’s financial system would become progressively more open following accession to the WTO. They failed to recognize that its closure is not simply an economic condition. It is a political arrangement rooted in the nature of CCP rule.

Contrary to such expectations, China’s financial system has instead moved in the opposite direction. Given the constitutionally guaranteed primacy of state ownership, Chinese holders of private wealth are wary about the security of their assets and eager to relocate them to jurisdictions with stronger protections for private property. These destinations are mostly former or current British territories with entrenched common-law traditions, such as Hong Kong, Singapore, the Cayman Islands and the US. The pressure of capital flight grew as the Chinese economy entered a period of deepening crisis in the last decade, with no clear end in sight. This, in turn, has intensified the CCP’s urge to tighten capital controls.

Offshore RMB markets – Hong Kong is the largest – were supposed to serve as the launchpad for internationalization, providing a freely convertible pool of Renminbi. But Beijing’s anxiety over the widening gap in interest rates and valuations between offshore and onshore RMB, and the resulting risks of financial instability, has slowed their expansion. Offshore deposits currently amount to less than 0.5 per cent of those onshore. By comparison, more dollar deposits are held outside the United States than within it.

An increasing share of Chinese trade is now conducted in RMB rather than USD, boosted by the growth of trade with Russia. Yet because China runs large surpluses with most of its trading partners, this has not led to substantial accumulation of offshore RMB. If two countries other than China – Saudi Arabia and Brazil, for example – wished to trade with one another in Renminbi on a large scale, they would immediately confront the problem of Renminbi scarcity in offshore markets. Were they to settle transactions onshore in China, they would find limited investment opportunities and significant restrictions on moving their money out of the country.

Had China opted for greater financial openness and made the Renminbi fully convertible, we would likely already have witnessed significant erosion of the dollar’s primacy. Many economies in Asia, including those dependent on China within the Belt and Road Initiative, might have begun a process of de-dollarization by taking RMB-denominated loans from China and increasing their use of RMB in trade. This would at least have marked the end of dollar hegemony within China’s sphere of influence, which has expanded rapidly in recent years as American geopolitical influence in Asia has declined.

Thus, just when the US global military umbrella – the longstanding foundation of dollar hegemony – is showing signs of weakening, the CCP’s party-state is inadvertently prolonging the dollar’s dominance. Short of profound financial reform in China, the current stalemate, in which the world remains reluctantly trapped within the dollar system, is likely to persist. It is ironic that as US-China rivalry intensifies, China’s control over its economy has become a key factor in the staying power of the American empire.