The international monetary order established at Bretton Woods in 1944 placed the dollar at the centre of the global financial system. It was built on the assumption that this infrastructure would be neutral and accessible. This allowed states to rely on dollar-denominated markets, payment systems, and cross-border banking networks regardless of political alignment. However, this assumption of neutrality is increasingly being tested, as access to dollar-based financial infrastructure has become more closely linked to geopolitical conditions. Countries did not have to be US allies to rely on the depth and liquidity of the dollar, and over time, the dollar remained the anchor of global finance despite the emergence of potential alternatives such as the yen and the euro.
We are not witnessing de-dollarization — the dollar retains roughly 58 percent of global reserve holdings and continues to dominate trade, finance, and cross-border payments — but rather an increasing fragmentation of the financial system driven by geoeconomic factors. This is reflected in reserve diversification, the development of alternative payment channels, and increased gold accumulation as a hedge against geopolitical risk. The dollar remains dominant, but its dominance is increasingly conditional.
Fragmentation is distinct from de-dollarisation because agents, particularly sovereign states, are not seeking to exit the dollar but to reduce their exposure to it.
The G7’s escalation of financial sanctions after Russia’s invasion of Ukraine in 2022 marks an inflection point in this process. Financial sanctions are not new instruments in the statecraft toolkit, but the scale and scope of recent measures differ significantly from earlier cases. When the United States froze Iranian central bank assets in 2012 and barred Iranian banks from SWIFT, it demonstrated that dollar exclusion could be applied to a relatively isolated economy. The structural implications, however, remained contested.
In contrast, Russia was the world’s 11th largest economy, with a critical role as an energy and commodities exporter. The freezing of approximately $300 billion in Russian central bank assets marked a structural escalation in both scale and target, extending the use of financial sanctions to a systemically significant economy. Moreover, decades of financial globalization have widened the channels through which sanctions on such economies can generate spillover effects across the global financial system.
In response, states have increasingly adopted hedging strategies to diversify their assets and reduce dependence on the dollar system. States are attaching a higher value to optionality amid an increasingly uncertain environment. In this sense, the adoption of hedging strategies reflects the dollar’s continued dominance as a reserve currency; states have not abandoned the dollar nor significantly increased their holdings of alternative reserve currencies, but have instead sought to reduce concentrated exposure by reallocating reserves toward assets such as gold and by developing complementary financial channels.
This process of diversification has been most visible in the growing demand for and accumulation of gold as a strategic reserve asset since 2022. More broadly, countries have begun to develop alternative financial infrastructure, such as China’s Cross-Border Interbank Payment System and projects such as mBridge. While these initiatives do not currently rival the established Western-centered financial system, they function as complementary channels that can be used if access to existing infrastructure is disrupted.
A fragmented financial order is likely to be less efficient than a unified one. The most immediate costs fall on firms and states navigating multiple payment systems, regulatory regimes, and the compliance risks associated with secondary sanctions. A second channel operates through sovereign debt markets. For decades, US Treasuries were regarded as the quintessential safe asset, but foreign official accumulation has slowed while long-term yields have risen, raising questions about their perceived neutrality. The institutional implications are also significant: fragmentation complicates the ability of organizations such as the IMF and World Bank to conduct effective surveillance and coordination within a more politically segmented system.
More broadly, the drivers of monetary fragmentation — particularly the desire to reduce exposure to geopolitical risk — suggest that political considerations may increasingly override efficiency in the international financial system. This raises the risk that cooperation among major economies becomes more difficult, potentially weakening the mechanisms required to respond to future systemic crises.
The process of financial fragmentation is part of a broader transition in the international balance of power. The global system is moving away from a unipolar configuration toward a more contested and asymmetric multipolar order in which financial infrastructure becomes an arena of geopolitical competition. While the dollar is likely to remain central for the foreseeable future, the conditions that underpin its dominance are evolving. The emerging system is therefore likely to be more fragmented, more politically contested, and more complex to manage than the one that preceded
