Commerzbank’s Thu Lan Nguyen highlights growing legal tensions around US sanctions on Chinese refineries buying Iranian Oil, warning this could erode the Dollar’s reserve status over time. Beijing’s blocking statutes create a sanctions grey area that may encourage companies to bypass US payment systems and USD settlement, adding another incremental challenge to the dominance of the US currency.

Sanctions conflict threatens Dollar dominance

"The war in Iran has somewhat overshadowed it, but geopolitically, things are also simmering for the US in a number of other areas, particularly with regard to China. This week, US President Trump is traveling to Beijing for a two-day summit with Xi Jinping. The outcome is likely to be of great interest to the foreign exchange markets."

"This legally precarious situation for companies poses a threat to the US dollar’s status as the world’s reserve currency — a danger we have warned about frequently in the past. This is because one way to avoid sanctions would be to bypass the US financial system so that transactions would not be visible to US authorities. In other words: Companies would have to forgo both settling transactions in US dollars and using US payment systems."

"Of course, trade with the five Chinese refineries in question is likely to be modest and therefore unlikely to trigger a widespread shift away from the US dollar in international trade. However, it is another pinprick against the dominance of the US currency."

"Moreover, Beijing has set a dangerous precedent here. If this is the new approach to dealing with unwelcome US sanctions, the move is likely to gradually have wider repercussions. Legal experts even warn that this could be just the beginning of a campaign to counter sanctions."

"Incidently, shortly before the summit, the US government imposed new sanctions on Chinese companies accused of cooperating with Iran. As a USD investor, you should closely monitor Beijing’s reaction to this."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)