Teflon isn't going to dissolve, but it shreds easily and could wind up blocking small passages. Point is, none of the parts of the power steering system use tapered threads for a seal, so the thread lubricant (teflon) only serves to make achieving a lot of torque on the fitting a bit easier. Like Mark suggests, get out your powerful light and magnifier and look for the defect in the seal. It is a crack, scratch, or piece of FM (foreign material) you're after.