Michael Wan at MUFG discusses US threats of economic punishment on countries dealing with Iran and new sanctions on over 60 entities. He argues that rising geoeconomic fragmentation encourages countries to diversify reserves, trade and financial links away from reliance on any single system, including the Dollar-based one. Wan also references ongoing US–Canada trade tensions and perceived uncertainty around US trade agreements.

Geoeconomic fragmentation and reserve shifts

“US 10-year yields fell a touch to 4.69% as news reports emerged that the US Treasury could use the Treasury General Account – essentially the US Treasury’s “savings account” at the Fed – for buyback auctions.”

“This is even as Treasury Secretary Scott Bessent refrained from providing any further signals on revamping US debt management, and that the US Treasury will continue with regular program of debt auctions as announced in the last quarterly refunding.”

“All this comes as the US threatened economic punishment against any country doing business with Iran as part of an “economic D-Day” campaign to isolate the country, with Scott Bessent saying that countries will face a specific timeline to shutdown links with Iran or face unilateral US punishment.”

“The US also unveiled sanctions against more than 60 entities, focusing on five of Iran’s “most vital lifelines”, including digital assets, technology, gold, aviation and shipping.”

“Beyond whether these measures will be effective in achieving the US’ aims and objectives, the broader macro picture is that with greater geoeconomic fragmentation, it seems rational for countries around the world to diversify their reserves, trade and financial linkages further to prevent themselves from being too reliant on any one system, including our current Dollar-based one.”

“This also perhapsincludes ongoing trade tensions that we see playing out right now between the US and Canada, and certainly in Asia there is also a quiet and unspoken sense that trade deals and agreements with the US are written more on pencil rather than with a pen, as Canada Prime Minister Mark Carney said.”