Dollar Dominance Under Threat as China Prepares to Counter US Sanctions

The Trump administration's threat to cut Chinese banks off from the US dollar system has been seen as an attempt to pressure Beijing over its trade ties with Iran. However, analysts argue that this move may have backfired, providing China with a reason to use the alternative payment systems it has spent years building.

Peter Alexander, founder and managing director of Z-Ben Advisors, told CNBC that the dollar's power as a weapon relies on its targets having nowhere else to go. Every credible threat to cut off a large trading partner from the system is also an advertisement for them to build their own alternative faster.

Beijing has indeed been preparing for this scenario for over a decade. In 2012, the Obama administration cut a Chinese bank off from SWIFT, prompting China to introduce its own interbank payment system, CIPS, in 2015.

CIPS is already being used by some countries to settle trade with Iran, which is China's largest commercial partner. Most of their trade is currently cleared outside the dollar system through various architectures that include renminbi settlement and barter arrangements.