1. Introduction: Dollar Hegemony Can No Longer Be Defended by Monetary Policy Alone
As of 2025, we are witnessing a turning point in the U.S. hegemonic strategy. In the past, the United States maintained global influence through the dollar. It was the key currency. Interest rate policies were driven by the Federal Reserve (Fed). Today, that order is breaking down. Trade policy and tariffs are now part of financial policy. The Fed is no longer functioning as an independent institution. It is becoming subordinate to Treasury-led strategy. Under the second Trump administration, Treasury Secretary Bessent has taken a central role in a strategy. It merges diplomacy, trade, and bond markets. U.S. monetary hegemony is increasingly shifting toward diplomatic leverage and trade tariffs.
This change is not simply about adopting new tools; it has emerged out of the limitations of the old tools. At the heart of this shift lies the collapse of the liquidity illusion.
2. The End of the Liquidity Illusion: The Collapse of the QT-TGA-RRP Triad
Since 2022, the Fed has been implementing Quantitative Tightening (QT) to withdraw liquidity from the market. Surprisingly, the market did not experience the expected shock. Why? Because two hidden liquidity buffers were at work: TGA (Treasury General Account) expenditures and RRP (Reverse Repo) balances.
- TGA: Treasury issued bonds and injected the proceeds into the market through spending.
- RRP: Money Market Funds (MMFs) withdrew funds from the Fed and reinvested them back into the market.
These two mechanisms offset the liquidity absorption of QT. They create the illusion that reserves were not actually falling. Even as QT progressed, the Fed did not feel the real pressure of shrinking liquidity.
But by 2025, that illusion has disappeared:
- RRP balance: From $2.2 trillion in 2021 → $55 billion in April 2025
- TGA: Severely constrained spending capacity since late 2024 due to increased bond issuance
- Reserves: Over 10% decline since mid-2023
The actual liquidity squeeze is now fully exposed as a result. This leads to tighter lending conditions in the financial sector. Demand for long-term Treasuries is also weakening. QT is no longer a background operation—it is now a real, structural tightening impacting credit and bond markets.
3. Fed vs. Treasury: A Power Struggle Over Monetary Policy
Traditionally, the Fed controlled interest rates independently to manage inflation and employment. But under the Trump 2.0 administration, the Treasury is absorbing monetary tools into its broader strategic playbook. Secretary Bessent is using tariffs to influence interest rates. She is also coordinating media signals with Wall Street to engineer asset market sentiment.
Let’s look at the correlation between tariff announcements and Treasury yields:
- Nov 15, 2024: Trump announces first tariff reimplementation → 10Y yield rises 20bps
- Feb 5, 2025: Reports of alliance tariff system negotiations → 10Y yield drops 12bps
These reactions suggest that tariffs have become a psychological stabilizer in bond markets, offering a sense of predictability and control. Tariffs are no longer mere trade barriers—they are instruments of financial signaling.
As a result, the Fed is no longer the core controller of interest rates. Its tools—dollar swap lines, forward guidance—are now increasingly subject to the strategic will of the Treasury.
4. From Dollar to Tariffs: The Global Realignment of Power
Bessent’s strategy is not confined to domestic policy. The U.S. is building a tariff alliance system with its allies. This is not just trade enforcement—it is a geopolitical restructuring of supply chains and capital flows.
In response, Xi Jinping has urgently visited ASEAN, the Middle East, and Central Asia, reacting to the U.S.-led “numbers game” of tariff diplomacy. China’s structurally low consumption and centralized state-finance model limit its flexibility. It can’t organically integrate diplomacy, private capital, and financial signaling the way the U.S. can.
Trade data shows a clear supply chain shift:
- China → U.S. export share: 16.8% in 2023 → 14.1% in 2025
- Vietnam → U.S. export share: 7.9% → 10.4%
- Mexico → U.S. export share: 14.2% → 16.0%
Tariffs are now guiding both production relocation and capital redirection. This affects even the demand base for U.S. Treasuries. Dollar hegemony is moving away from liquidity dominance and toward networked diplomacy and strategic supply chain control.
5. Conclusion: If You Don’t Understand Structure, You’ll Lose in Markets
This is no longer a market of simple rate forecasts. The very structure that moves interest rates is changing. The liquidity illusion is gone. Tariffs now function as strategic financial tools. The Fed’s independence is shrinking, and monetary signals are subordinated to geopolitical policy.
What this means for investors:
- Bond strategy: Increased volatility due to weakened Fed control. Risk management must assume political interference.
- Real assets: Gold, silver, and commodities are rising as defensive plays in supply and trust shocks.
- ETF allocation: Consider structural rebalancing between long-duration U.S. Treasuries and real assets; also explore ETFs linked to emerging supply chain beneficiaries.
Markets today require structural interpretation, not numeric prediction. Where has liquidity flowed? How has monetary policy been politicized? Who gains or loses from each flow?
Answering these questions means understanding where power is moving. And that determines who wins.
HOHO-ECONOMICUS Insight 
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