All about the Benjamins

US commercial and legal reach pegged to dollar

America's commercial and legal reach is pegged to the almighty dollar. Whether fining foreign banks like BNP Paribas or barring US firms from business with governments it wants to punish, the United States has huge global clout. Having big companies and banks is part of it, but issuing the world's reserve currency - and clearing trades at home - may do more.

BNP and HSBC recently coughed up multibillion-dollar penalties for doing business involving Iran and other nations on the outs with Uncle Sam. The foreign banks were accused of violating the International Emergency Economic Powers Act and similar US laws that bar dealings with countries under American sanctions.

Those laws applied in part because the banks have offices in New York. Perhaps more significant, the firms also engage in major transactions involving US dollars. Almost all such deals are cleared and settled in the United States through the Federal Reserve's FedWire or the Clearing House Interbank Payments System, or CHIPS, owned by member banks. The services receive instructions on how and where to send the money and then transfer it, creating another hook for US legal jurisdiction.

Dollar-denominated trades are not required to move through America, just as yen deals need not be cleared through Japan or euro transactions through a European Union nation. But the system is so widely used and well established that avoiding it would be costly. As a result, even large financial institutions having virtually no contact with America must probably comply with US sanctions laws. Otherwise, they could be excluded from dollar transactions, which total about $14 trillion in payments each day.

Major nations could, of course, agree to stop relying on the dollar as a near-universal currency. That won't happen any time soon, though. Besides, the United States is still the world's largest and most lucrative market, with the value of its annual imports totaling twice that of Germany's and 20 percent more than China's. Few big companies would risk getting shut out.

The combination of those factors gives US sanctions powerful bite. That may understandably cause resentment among foreign nations and companies. As BNP and HSBC could attest, however, the cost of defiance is high.