In this case, is part of a set phrase which is or (lit. A scratch on the jewel) which is analogous to the English version _A fly in the ointment._
The phrase then means that it's a small annoying something that sours the mood of enjoyment or success (similar to how a scratched jewel isn't as beautiful as an undamaged one, and is as such a minor annoyance or flaw).
This might be describing the characteristic of the character with the rest of the phrase at the beginning:
>
> (Her being) domineering is the "scratch on the jewel (lit.)"
A very loose translation that is probably truer to an English tone is:
> She thinks she's on top and that's her (only) flaw.
Special thanks to Chocolate and By137 for the point-outs.