Alternate universe: Game theory, Dollar hegemony, and the next shock

Every weekend, I carve out time to run through the full news cycle—not just the headlines, but the subtle shifts, buried leads, and conflicting signals that often go unnoticed or misinterpreted during the week. It’s become a critical part of my process. I don't just scan for what happened—I dig into how it was reported, why it might have been missed, and what I might have misunderstood.

But the real value for me lies in playing out alternate universe scenarios—those “what if” threads that rarely make it into mainstream commentary. I find that by walking through tail risks and contrarian hypotheticals, I sharpen my edge. It forces me to think beyond the dominant narrative and stress-test the assumptions driving positioning across FX, rates, equities, and commodities.

What if the BOJ tightens more aggressively than anyone expects? What if the U.S. leverages dollar liquidity in a full-scale geopolitical playbook? What if a black swan hits supply chains again—not from China, but from a supposedly “safe” Western economy?

Markets rarely price in these tails until they’re halfway through the door. That’s why I treat this weekend ritual not just as research—but as rehearsal. It helps me stay flexible, challenge my own bias, and identify asymmetric trades long before they go mainstream. Most of the time, they are nothingburgers, but when they hit, I’m early, and that’s where the payoff is.

A few weeks ago, I wrote a “what if” scenario that still lingers in the back of my mind: what happens if Japan decides to stop buying U.S. Treasuries—not because of yield differentials or FX intervention, but as a calculated trade negotiation tactic?

It’s not as far-fetched as it sounds. Japan remains one of the largest foreign holders of U.S. debt so Tokyo commands outsized influence in UST demand dynamics. In a high-stakes trade war or tariff standoff with a second-term Trump administration, it’s entirely conceivable that Japanese policymakers—either through government directive or by signalling via institutional flows—could scale back or even halt purchases of U.S. paper to exert pressure.

But here’s the rub: the U.S. wouldn’t need to retaliate with tariffs or sanctions. It could simply weaponize dollar liquidity.

The U.S. Treasury and Federal Reserve wouldn’t need to issue statements or take overt action in this alternate universe. The move would be subtle but powerful, tightening access to dollar funding via swap lines suspension or restricting Japanese banks' access to short-term repo facilities and dollar rollovers. Given Japan’s heavy reliance on dollar funding—especially in offshore markets where Japanese banks are major players—this would send shockwaves through Tokyo’s financial system.

It’s a simple equation: no Treasuries, no dollar taps.

This kind of move wouldn’t be announced—it would be implied, whispered in the corridors of bilateral trade talks. But the message would land. Japanese institutions, already juggling thin NIMs, demographic headwinds, and a sluggish domestic market, would be forced to scramble for dollar liquidity in a bidless market. Cross-currency basis swaps would blow out, and the yen could strengthen aggressively as capital floods home in search of funding stability—ironically compounding the pain for Japan’s exporters and its equity market.

The broader implications? Massive. A dollar funding squeeze triggered by geopolitics would send tremors across EMs and global credit markets. Eurodollar risk would spike, LIBOR-OIS spreads could widen again, and investors would be reminded—harshly—that the dollar isn’t just a reserve asset. It’s a leash.

This kind of tail scenario doesn’t show up in base case models or consensus forecasts. But in a world where monetary tools are increasingly used as levers of statecraft, we have to game these out. The idea that financial stability is apolitical is outdated. In the new era of geopolitical finance, access to dollar liquidity is just another chip on the table. And when push comes to shove, the U.S. knows exactly where to tighten the spigot.

Now, what if the U.S. didn’t stop at Japan? What if Washington decided to apply that same financial pressure tactic to Europe—leveraging the global dollar system as a tool of economic statecraft in its ongoing confrontation with the EU?

Make no mistake: European banks are even more dependent on dollar funding than their Japanese counterparts. According to BIS data, European financial institutions hold over $1.4 trillion in dollar-denominated liabilities offshore, much of it tied to short-term trade finance, cross-border lending, and structured products. That reliance is structural. It's also fragile.

Imagine a scenario where the U.S. Treasury, nudged by a second-term Trump administration facing a belligerent European trade front, decides to suspend or curtail Fed swap lines with the ECB. Dollar repo access tightens. U.S. money market funds start pulling back on European bank exposure. Overnight funding becomes more expensive—or dries up entirely. The result? An FX funding crisis hidden in plain sight.

This is a chess move, not a checkmate—but the U.S. just reminded the world who holds the board.

The ECB’s rare public warning about a looming dollar shortage didn’t just expose a liquidity gap—it laid bare a deeper truth: dollar dominance remains the cornerstone of global financial power, and Washington is prepared to wield it with precision. The timing is no coincidence. As Europe clings to its technocratic fortress of green subsidies and hidden trade barriers, the U.S., under Trump’s return-to-form economic doctrine, is arming its financial arsenal and targeting structural imbalances with surgical intent.

The breakdown in swap lines—quietly frozen without fanfare—may look like a technical tweak, but to market insiders, it’s a geopolitical escalation by stealth. Eurozone banks, heavily reliant on dollar funding for offshore operations and trade finance, now face a sharp repricing of risk. The post-LIBOR era was always going to shift power toward the U.S., but with SOFR now entrenched, dollar liquidity is a weapon—not a lifeline.

What’s unfolding isn’t just a trade war; it’s a monetary power play. Just as the Plaza Accord reset the rules of engagement in 1985, we may be witnessing the early stages of a modern-day replay—except this time, the U.S. isn’t asking for cooperation. It’s tightening the screws.

China may be devaluing the yuan to export its internal mess and stem middle-class unrest, but that’s a side show. The main stage is in Europe, where Washington sees a protectionist bloc wrapped in green tape and regulatory barbed wire. Trump’s tariffs and policy rhetoric are the cudgel—but the dollar shortage is the scalpel, surgically applied to crack the eurozone’s economic armor.

Markets will feel the tension in the cross-currency basis, in bank funding spreads, and in a growing reluctance to hold European risk without a dollar hedge. The April TIC report and any leaks around eurozone swap line freeze details could catalyze sharp moves. Keep your eye on EUR/USD volatility, dollar funding spreads, and front-end FX swaps. If dollar liquidity tightens further, the ECB may have to intervene in ways that fracture the illusion of policy independence—and reinforce the dollar’s role as the global financial truth serum.

The bottom line is that the U.S. is sending a message—access to the dollar is no longer a given. It’s a lever of leverage. And Brussels, for all its green planning and regulatory might, just got reminded that in the world of global finance, he who controls the reserve currency, controls the rules.

I don’t think we’re there yet—but it’s a scenario I keep running. Because if we ever do get there, the repricing won’t be gradual. It’ll be violent.