Sheriff Trump, Bond Vigilantes, and the Wild West of Global Finance

By Arnout Berghs

Arnout Berghs is a PhD student with the Ghent Institute for International and European Studies (GIES). He is affiliated with Ghent University.

The sheer force by which the second Trump administration disrupted both global and domestic politics during its inaugural year has rekindled the perennial pessimism about the life cycle of dollar hegemony in trade and finance. The question is whether the declinist case accurately describes what is happening now. Much of what appears to be dollar decline could just as well be volatility generated by the ‘wild west’ of global finance, as highly leveraged trades and open speculation unwind in spectacular fashion under the slightest distress. Meanwhile, the infrastructural foundations of dollar hegemony persist under, and accommodate these market shenanigans.

The sheer force by which the second Trump administration disrupted both global and domestic politics during its inaugural year has rekindled the perennial pessimism about the life cycle of dollar hegemony in trade and finance. Meanwhile, Trump, recently dubbed “the new sheriff of capitalism” by US Secretary of Commerce Howard Lutnick (2026), anchored the fate of stablecoins to the greenback (Sachdeva and Saravelos, 2025) and tried to strong-arm trading partners into continued dollar use (Jones et al., 2025; Williams, 2024), while his economic advisors floated the idea of putting together a Mar-a-Lago Accord in which foreign countries would ‘voluntarily’ hold perpetual zero-coupon Treasury bonds (Miller, 2024). Yet such unorthodox economic statecraft has only strengthened the sentiment that the sheriff’s erratic policy swings might destabilise the dollar system he claims to defend (Kamin & Sobel, 2025).

Serving as the highest means of settlement in the world even as the relative weight of the US economy has been steadily declining, the dollar is an almost mythical creature whose demise is forecast every so often. Whenever this argument re-emerged, from the dollar getting off gold, rapid financial development in Japan, the introduction of the euro, to the many financial crises the world has weathered, the dollar system proved resilient and adaptive. If this graveyard of failed predictions teaches us anything, it is that dollar dominance is a frequently misunderstood moving target, evolving with the changing nature of capitalism and the increasing complexity of financial markets.

Nevertheless, prominent voices from both the mainstream (e.g. Rogoff, 2025) and more heterodox schools of analysis (e.g. Pforr et al., 2025) argue that Trump is really changing the game, and that it is now appropriate to cry wolf. Firstly, the grip of the dollar on the global economy had already been declining before Trump. A worsening US fiscal position pushed up interest rates on government bonds (Bernstein et al., 2025) and BRICS members have been developing alternative ways to settle in reaction to two decades of the US financial sanctions regime (McDowell, 2021). Secondly, the Trump administration is catalysing this process by undermining central bank independence and disturbing international economic relations in ways that had seemed unthinkable under the liberal rule-based order. This erodes trust in the capacity of the US to provide public goods and fulfil its liabilities, dampening foreign public and private sector demand for American-made promises (Pforr et al., 2025). Thirdly, leadership in China (Leahy & Leng, 2026) and Europe (Lagarde, 2025) have spelled out plans for further currency internationalisation by increasing their currency’s respective share in global trade invoicing, which could cascade in an expansion of non-dollar credit, potentially offering wealth holders alternative vessels for value storing and clearing.

For all the bluster from the Trump administration about upholding the dollar order through tariff blackmail and crypto alchemy, the picture painted by declinists is a rather ugly one. The dollar system is not a purely state-led system, but a hybrid one (Mehrling, 2013) in which private actors willingly hold state liabilities because they need (1) interest-bearing safe assets that (2) can easily be liquidated to resolve a survival constraint: actors need access to currency they can pay with if the need arises (Kaltenbrunner & Lysandrou, 2017). Thus, for the US, losing the centrality of the dollar in the global financial system implies losing access to cheap credit abroad. Moreover, the volatility resulting from such an adjustment is highly unlikely to be contained to the US economy, as non-US balance sheets are flush with dollar-denominated instruments (Bank for International Settlements [BIS], 2026). Given these stakes, one would be tempted to imagine what such a world would look like (e.g. Murau, 2026) except that decades of failed predictions suggest we should be wary of futurology as way of analysis (Greeley, 2026).

The question, then, is not whether the dollar will fall, but whether the declinist case accurately describes what is happening now. This paper argues that a closer examination of market behaviour and foreign reserve policy during Trump’s first year back in office reveals a more complex picture. While some commentators hailed the return of ‘bond vigilantes’ (Scaggs, 2025), much of what appears to be dollar decline could just as well be volatility generated by the ‘wild west’ of global finance, as highly leveraged trades and open speculation unwind in spectacular fashion under the slightest distress. It is in this context that Sheriff Trump regularly backs down from crossing red lines and markets restore quickly, albeit with stronger hedging against dollar-denominated assets. Meanwhile, the infrastructural foundations of dollar hegemony persist under, and accommodate these market shenanigans.

What follows is a brief conceptual note clarifying dollar centrality in today’s globalised economy. It provides a framework for the main argument in the third section, which goes over some key market swings that fuel declinist sentiment. The last section concludes by refocussing the debate on the public-private infrastructure that keeps dollar dominance alive and, at times, kicking.

Dollar hegemony in global markets

There is some debate on whether it was markets rather than politics which determined the rise of the dollar as the key currency, but for reasons of space we can understand the Bretton Woods agreement as what tied the international monetary system to the dollar. Nevertheless, after its breakdown during the Nixon years, the dollar is still ubiquitous in global markets. Its seemingly unlikely persistence thus spurred many different explanations of what sustains it, not all of them mutually exclusive.

Within economics, dollar hegemony is seen as an equilibrium outcome of private actors’ pursuit of self-interest, as market forces determine asset demand (Rogoff, 2025). However, a political economy framework would point out that economic structures themselves are established by state power, one consequence being that states shape the scope and denomination of the ‘asset menu’ (Palley, 2022). Inevitably, what counts as a linchpin of the dollar system will depend on what corner of the global economy one focuses on.

The problem is that many political economy theories that address dollar dominance depend on the ability of the United States as a Westphalian sovereign to ‘convince’ wealth owners in the real economy to hold dollars. But if the world marches further towards economic multipolarity, what is holding back dollar holders to switch to alternative currencies? Put differently, is the hierarchy of currencies nothing more than a competition between countries allowing public and private participants to shift freely between legal tenders?

A credit-theoretic perspective on money suggests otherwise: the persistence of currency hierarchy is more about the structure of the payment system than it is about persuasion (Mehrling, 2022; Murau et al., 2023). In this view, the economy exists as a complex web of balance sheets that interlock through various credit instruments. As such, money is not just a token, but itself a debt instrument that has a corresponding liability on another actor’s balance sheet. This implies that private actors can create money by issuing IOUs[1]. However, to settle these promises, one needs ‘currency’, a money only central banks can create. Money is thus a hybrid system, in which state money disciplines private issuance.

When actors face shortages at settlement, they need to sell an asset or take a loan from someone else. This can happen to actors with a ‘matched book’ balance sheet because different IOUs mature on different timelines: the focus here is on liquidity, not on solvency. As such, one can think of the economy as a payment system, which is disciplined at the unit level by a survival constraint. Simply put, if you can’t pay up what you owe at clearing, you’re dead.

Short-term money markets relax this constraint as liquid (surplus) actors lend to non-liquid (deficit) actors at a market-determined interest rate. However, if the number of deficit actors outpaces surplus actors, the price of pushing the day of reckoning into the future will be higher and liquid actors will start hoarding currency to deal with growing uncertainty about the future. This brings us to the first reason why the dollar system is so sticky: there are a lot of high-quality dollar-denominated assets sloshing around and money markets in USD are deep and sophisticated. Selling those assets to make payment generally does not depreciate their price and finding a dealer that is willing to enter a contract for a cheap overnight loan in dollars is relatively easy. This is self-reinforcing, because the more people issue dollar-denominated IOUs, the more attractive it becomes to issue dollar-denominated IOUs (Kindleberger, 1967).

Beyond the centripetal forces of market efficiency, theorizing money-as-credit provides us with another reason why people hold dollars. If it turns out that private credit in total has expanded beyond the return rate of the underlying investments – or, from a macro perspective, demand – and money markets dry up because of stress, fire sales slash asset prices and debt-leveraged actors default en masse. It is key to note here that this is a recurring phenomenon in financial markets, as periods of economic stability lead profit-maximizing entities to increasingly take on more risk, i.e. increasingly rely on functioning money markets to ‘roll over’ existing debt or, in the worst case, take on more debt to live another day (Minsky, 1977).

In a closed economy, the central bank can prevent financial meltdown by injecting liquidity into the system. In the real world, the economy is global, and as discussed earlier, money created by private actors end up in balance sheets stretched over political jurisdictions. For private actors to continue using the dollar they must be able to imagine what a public backstop would look like. Throughout recent history, the Federal Reserve has consistently bailed out banks and investors, validating excess private credit creation in US dollars (Murau & Schwartz, 2025). Importantly, they were also willing to extend backstops to so-called offshore markets, where a lot of the private dollar action is going on. After the 2008 Financial Crisis, the dollar even gained in market share, despite the crisis originating in the heart of the US financial system (Pradhan et al., 2026).

While it does not provide us with a satisfactory answer as to why the dollar gained centrality, thinking of money as credit explains why it persists: private actors are drawn to the dollar because there exist deep and open markets for money-like, interest-bearing credit that is easily exchangeable for currency, which is proven to be institutionally backstopped by a pro-market central bank. This should give us a good reason to be cautious, if not sceptic, when evaluating claims of the forthcoming end of dollar dominance.

Bond vigilantes or wild west speculators?

The inciting moment of much of the recent iteration of dollar declinism happened the week after Trump announced the US was going to slap so-called reciprocal tariffs on every country in the world. While market sentiment was bullish right after Trump’s election victory due to his deregulation and tax-cutting agenda, Liberation Day fuelled panic among investors and concomitant portfolio adjustments. The flashpoint for many was that the correlation between the dollar value and Treasury yield broke down. In normal times, a higher yield on US government bonds attracts inflow of capital, as the opportunity cost of holding more risky assets in less liquid markets raises. This, in turn, puts an upward pressure on the dollar value, resulting in an observable correlation between the two prices. The general reading here is that Treasuries lost their safe haven status, as investors sold off both US equity and government bonds at the same time in a dash for cash to cope with the uncertainty of the Tariff Wars. In some places, this was heralded as the big return of the ‘bond vigilantes’, large investors who punish unorthodox economic policy by selling off public debt which raises the cost of borrowing for the target country (Scaggs, 2025).

A closer look reveals other factors at work. As it turned out, highly leveraged hedge funds trying to arbitrage the difference between the price of Treasury bonds and their derivative contracts were hit by margin calls during the tariff turmoil and had to liquidate Treasuries to pay back creditors (Wigglesworth et al., 2025). The differences between these prices are minimal, but as Treasuries are high-quality assets they are used as collateral to borrow more money and repeat the process[2] up to 100 times over, making the trade worth the effort. In calm times, these kinds of trades provide demand for government debt, thus helping to keep yields down. However, when market volatility increases, creditors will demand more collateral to back up the underlying loan, leading to a fire sale of financial assets to scramble together the necessary funding. As these hedge funds control about 10 percent of the Treasuries held in private markets (Ehlers & Todorov, 2025), a forced unwind has repercussions throughout the wider financial system.

One of these trades believed to wind down rapidly after Liberation Day was not just an attempt to arbitrage Treasury prices, but, in fact, a far more speculative endeavour. Hedge funds were betting on financial deregulation by buying up Treasuries and providing fixed interest rates to other borrowers in the market. This is profitable in high volumes, as the yield of Treasuries was slightly greater than the fixed interest rates they had to pay. The idea was that if Trump was to lower the liquidity rules of banks put in place in the aftermath of the 2008 Financial Crisis, banks would be allowed to use more space on their balance sheets for bonds, Treasury demand would go up, and hedge funds could unwind the trade taking home huge profits (Ehlers & Todorov, 2025). However, instead of being deregulated, markets got stunned by tariffs and bond prices went down. Like in the so-called ‘basis trade’ outlined in the previous paragraph, these original positions were funded with borrowed money as they only generate profit in high volumes. The initial margin calls then started a kind of ‘doom loop’ as Treasuries flooded the market, lowering its price, raising margin calls, and forcing further liquidation.

Another smoking gun of dollar pessimism is found in the metal markets, especially the price dynamics and apparent buyer class of gold. Reaching records heights throughout 2025, the trajectory of the gold price has been taken as clear evidence that, in reaction to the MAGA madhouse, investors and central banks were looking for something better than the most powerful form of fiat money.

In hindsight there are two fallacies at play here. The numbers indicating that central banks or other big players were hoarding gold because they were losing trust in the dollar is an effect of, rather than the driving force behind the rising gold price. When gold suddenly made out 10 percent more of a central bank’s reserves it was generally so because the gold price went up. As central banks generally hold gold as a relative percentage in their reserves, some banks even sold gold instead of buying it (Hook, 2026).

Secondly, on a macro level, institutional investors did not increase nor decrease their gold assets (BIS, 2025). There is a very good reason for this: gold bears no interest, fetches a price that is highly dependent on market sentiment, and its value is also not backstopped by a central bank. The price increase was instead in large part a consequence of retail demand, that is, small investors pouring credit into gold hoping the line goes up (BIS, 2025). Rather than evidence of a loss of trust in the dollar, the bullishness around gold is perhaps better understood as a Keynesian beauty contest in which market participants put down their bets not according to economic fundamentals, but to the expectation that other participants will choose gold as a store of value over interest-bearing dollar-denominated assets. The point is that these investors are not drawn to gold because they need a store of value to hedge against dollar dethronement, but because they seek an instrument for speculation. Again, as in the previous examples, these positions are often funded with loans or through short-term options (or a combination thereof) rendering potential margin calls explosive. When Trump appointed an inflation hawk as Fed Chair in early 2026, the gold price suffered the largest one-day drop in more than 40 years (Smith et al., 2026).

It is in this high-volatility context that Trump waters down his braggadocious plans after market swings. The regularity of this backtracking has led to ‘Trump Always Chickens Out’ (TACO) to become an investment strategy for some, shorting before policy announcements and buying the dip that follows. These wild up and downs do have the effect that investors will lock in exchange rates when investing in the US, hedging dollar-denominated assets in FX markets. To offset risk, banks taking the other side of these deals will sell dollars at the spot rate, which drives down the dollar price significantly. Nonetheless, foreign money keeps pouring in US markets and the dollar still serves as central device for investors to move capital in and out currency jurisdictions.

The dollar infrastructure of financialised capitalism

The point here is not that the sheriff’s jingoism does not harm the real economy by creating uncertainty. Rather, what this paper has been trying to show is that players in the wild west of financialised capitalism seize opportunities in this newfound uncertainty by way of arbitrage and speculation. That this creates pressures on certain commodities, securities, or currencies does not necessarily mean that the dollar is close to meeting its maker. On the contrary, it is the Anglo-American model of finance, with open capital markets and seemingly unlimited support for excess private credit creation, that accommodates and sustains globalised ‘casino capitalism’.

Through global crisis management, central bank cooperation became the very heart of this system. The interconnectedness of balance sheets around the world means that liquidity droughts ripple through all markets. To manage this recurring problem, central banks, with the Fed at the helm, instituted automatic swap lines, providing backstops between different currency jurisdictions. So, when investors flock to the Swiss franc to counter dollar panic, they do not exit dollar land but enter one of its dependencies instead (Mehrling, 2022).

Whether the volatility in markets is the beginning of the end of dollar dominance or just the result of speculation sustained by the private-public infrastructure of financialised capitalism is not clear at all, and we should be wary to draw early conclusions. We still live in a dollar world.

Endnotes and references

[1] An IOU (I owe you) is a promise to pay.

[2] Buy Treasuries at price X, sell a contract to deliver it later for price X + Y, use the Treasury bond now as collateral to borrow cash for a small interest fee, buy Treasuries at a volume of price X – interest fee, go through the cycle again until you are unable to buy any more Treasuries.

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