US economic dominance begins to fray

Global investors are growing wary of US bonds, while concerns over the dollar’s long-term dominance were gaining traction. Foreign governments were also moving gold out of American vaults, signalling growing unease over Washington’s economic and financial leverage, according to an analysis published in The New York Times on Wednesday.

Almost two years into President Donald Trump’s second term, the global economy is increasingly looking for ways to reduce its dependence on the United States. Concerns over a $40 trillion debt burden, Washington’s growing reliance on sanctions as a foreign policy tool and Trump’s willingness to push the limits of the rule of law have raised questions about America’s appeal as a haven for global investment.

Despite pledges by foreign companies and governments to invest in the US — in some cases to curry favour with the White House — capital is beginning to seek alternative destinations.

“Geopolitical factors and US weaponisation of the dollar through financial sanctions are causing central banks and other official investors to attempt to diversify away from dollar assets,” said Eswar Prasad, former head of the International Monetary Fund’s China division.

The US, however, remained far from being an investment pariah. Private investors continued to pour money into US financial markets and stocks, while investment in artificial intelligence (AI) infrastructure was booming. No rival currency is currently positioned to displace the dollar as the world’s dominant reserve and transaction currency.

Testifying before Congress on Tuesday, Treasury Secretary Scott Bessent defended the strength of the US financial system, saying Treasury auctions remained successful and the dollar continued to dominate global transactions. “The US is in fact the leader, and the leader does not fear competition,” Bessent said. “Competition makes us better.”

But signs of strain were emerging.

The most visible pressure was in the bond market, where yields had risen as investors demanded higher returns amid concerns over mounting US debt. The yield on the 10-year Treasury topped 5% this week, reaching its highest level since 2007.

The threshold was crossed just a week after the Treasury Department purchased $5.2 billion of its own debt maturing in 10 to 20 years. The move was part of an effort to inject demand into the Treasury market, push bond prices higher and yields lower.

Bessent argued that investors were failing to appreciate the underlying strength of the US economy and even challenged markets to bet against him.

“It’s my dream,” Bessent said last week at Southern Methodist University. “I have asymmetric information. I am the house now.”

Still, the US’ long-term fiscal position was prompting some foreign investors to reassess their exposure to American assets. Norway’s sovereign wealth fund, the world’s largest, said this month that it planned to reduce its holdings of US Treasuries while looking elsewhere for stronger returns.

Then there was the dollar.

Nearly 90% of global foreign exchange transactions are conducted in dollars, underscoring the currency’s extraordinary reach. But its share of central bank reserves had been declining steadily, falling from 64% in 2015 to 56% at the end of 2025.

Last year, European Central Bank President Christine Lagarde said erratic policymaking in Washington was setting the stage for a “global euro moment”.

The dollar’s special status has also allowed Washington to use the currency and the US-dominated financial system as powerful foreign policy tools. The United States has imposed extensive sanctions on countries including Iran and Russia, restricting their access to international finance and making it harder for them to conduct cross-border transactions.

As Washington increasingly turns to sanctions to pursue foreign policy objectives, concerns about the permanence of the dollar’s reserve-currency status have grown.

The US began scaling back some sanctions this year amid concerns that excessive use of financial warfare was encouraging other countries to develop alternatives to the dollar-based system.

But Bessent reversed course in August with the announcement of Operation Economic Outcast, aimed at squeezing Iran’s economy and threatening secondary sanctions against countries that maintained economic ties with Tehran.

Even the Treasury secretary acknowledged the potential risks, saying that if the US was forced to make good on those threats, it could “blow up the global financial system”.

The euro and China’s renminbi are not yet positioned to overtake the dollar. But technological advances are giving countries new ways to reduce their reliance on the US financial system. Central bank digital currencies, stablecoins and cryptocurrencies could eventually offer alternative channels for international payments that are less vulnerable to American sanctions.

China has been leading the development of mBridge, a cross-border digital currency platform involving Hong Kong, Thailand, the United Arab Emirates and Saudi Arabia. The system is designed to allow money to move across borders more quickly and cheaply than through traditional banking channels.

Read: Dollar makes soft start to 2026 after biggest annual drop in eight years

A separate cross-border payments project involving Group of Seven countries and Western financial institutions was also under development, although it was not as advanced as mBridge.

Russia and India said last week that they were working on a mechanism that would allow them to use central bank digital currencies to settle international trade payments. Such a system could help the two countries expand bilateral trade while reducing their dependence on Western financial institutions that remained vulnerable to US sanctions.

“The story of moving away from the dollar is one of the oldest stories that exists,” said Josh Lipsky, chair of international economics at the Atlantic Council. “Countries have thought about working around the dollar, and technology is making it a little cheaper and easier to do it than before.”

While some countries were turning to digital currencies, others are opting for a much older store of value: gold.

In 2025, gold held in global reserves surpassed foreign official holdings of US Treasury securities. The price of gold exceeded $5,000 per troy ounce this year for the first time, as central banks increased purchases amid geopolitical tensions and concerns over inflation.

Demand has become strong enough for some countries to reconsider where they store their gold.

The Netherlands said this month that it had transferred a large portion of its 95 tonnes of North American gold reserves out of the US, citing “increasing geopolitical unrest” and the need to be prepared for a crisis.

Read More: Netherlands moves 86 tonnes of gold from North America to London amid global uncertainty

In March, the Bank of France said it had moved 129 tonnes of gold from the Federal Reserve Bank of New York to Paris.

The Trump administration has not threatened to seize foreign gold held in the United States. But the president’s repeated challenges to established international arrangements, including remarks about the possibility of taking control of Greenland and Canada, have contributed to broader questions about Washington’s commitment to international norms.

“It’s like the countries don’t trust the US,” said Daniel Tannebaum, a partner in Oliver Wyman’s finance and risk practice and a former Treasury Department official. “I do think that there is a fear factor.”

That concern was increasingly spilling over into the corporate sector.

Tannebaum said aggressive US tariffs and export controls had made European governments and companies more cautious about adopting American technology for sensitive industries such as AI.

The concern was straightforward: dependence on US technology and infrastructure could leave foreign companies vulnerable if Washington decided to restrict or disable access during a future geopolitical dispute.

Also Read: How token dependence is reshaping economic sovereignty in the AI age

The US had already used export controls and technology restrictions against countries such as China and Russia, reinforcing concerns among some governments that economic interdependence with Washington could become a strategic liability.

For now, America retains enormous economic advantages. The dollar remains dominant in global finance, US capital markets remain deep and liquid, and American companies continue to lead in sectors such as technology and AI.

But the combination of rising debt, aggressive sanctions, geopolitical tensions and uncertainty over US policy was encouraging governments, central banks and companies to consider how much dependence on America they were willing to accept.

“Governments and companies now have to ask what would happen if the United States turned its economic leverage against them,” Tannebaum said.