US Dollar: Fragmentation risks and reserve diversification – MUFG

Michael Wan of MUFG discusses the potential economic repercussions of U.S. threats to punish countries engaging in trade with Iran. He notes that rising geopolitical fragmentation may push nations to diversify their reserves, trade, and financial links away from reliance on the dollar-based system. Wan also references ongoing trade tensions between the U.S. and Canada, and the uncertainty surrounding U.S. trade agreements.

The U.S. 10-year yields slightly decreased to 4.69%, as reports emerged that the U.S. Treasury might utilize the Treasury General Account for buyback auctions. However, Treasury Secretary Scott Bessent did not provide further signals on revamping U.S. debt management, stating that the U.S. Treasury will continue with its regular program of debt auctions.

The threat of economic punishment against countries dealing with Iran, as part of a campaign to isolate the nation, comes amid the announcement of sanctions against over 60 entities. These sanctions target various aspects of Iran's economy, including digital assets, technology, gold, aviation, and shipping. While the effectiveness of these measures in achieving U.S. goals is uncertain, the broader macro picture suggests that countries may diversify their reserves, trade, and financial linkages to avoid over-reliance on a single system, including the dollar-based one.

This diversification may also be influenced by the ongoing trade tensions between the U.S. and Canada, as well as the perceived fragility of U.S. trade agreements in Asia.