“It’s a strange thing: We humans pride ourselves on being ruled by reason, yet with human civilization at stake, we chose ideology and ignorance.” —****James Lawrence PowellBaseline fact which ultimately explains why the US cannot ‘walk away’ and leave the Strait of Hormuz under Iranian control; The petrodollar allows the USD to be the global reserve currency, requiring (since 1973) for oil to be denominated and traded in dollars, resulting in the lingua franca of global trade to follow suit. The resultant constant demand for US dollars- and consequent accumulation by the central banks of every country involved in global trade- translates into a never-ending demand for US treasuries as a place to offload those dollars. This is the flip side of trade deficits, and allows the US to run deficits and a $39tr debt; we rest assured it can be funded through Treasury issuances.
This paradigm was severely injured when Russian assets ( ~$300b) in the SWIFT system were frozen post-Ukraine invasion; no longer were those dollar balances viewed in purely economic terms, because if they could be frozen for geopolitical leverage, a risk premium needed to be factored in. What we have seen since is a small but steady reduction in dollar holdings around the globe ( and a parallel rise in CB gold holdings).
But global trade is still based around dollars, despite some sputtering attempts by China to increase use of the Yuan.
if oil and petrochemical products begin to be priced in something other than the dollar; Iranian (or any government's) control of the Strait and its 20% share of global oil-flow revenues make this potential a massive economic and geopolitical lever.This all changesWe are already hearing that Iran is requiring those ships which are allowed transit to price in other currencies. Citrini’s piece overnight, if accurate, means GPS hijinx and transponder shutdowns are hiding a much higher tanker passage rate ( which means more product being priced in non-dollars). Clearly, US satellites are tracking traffic and not relying on gps, so we are fully aware of the state of play.
There has long been a thread connecting the US actions in Venezuela and Iran as conected with the larger US-China battle of dominance, with the US using control of energy supplies to counter Chinese control of raw materials and critical rare earth supplies. If oil trading becomes based on the Yuan, we lose.
Trump Floats Seizing Iran Oil as He Weighs Chinese Leverage Play
(Bbrg)
One more set of thoughts. This is a classic three-body problem, and for the two other players in this situation, the risk is seen as existential; as such, their desired endgame results are starkly different than that of the US. We have some influence over the actions of Israel ( emphasize ‘some’), and even less over Iran. The US government policy has been to increase the threat levels to try to force capitulation, which has so far been ineffective; it appears the Iranian regime was well prepared for a long conflict and planned for increasing horizontal escalation, and the religious and cultural nature of the country argues against any compromise.
So here we stand, faced with an unacceptable geopolitical/economic loss or a major military escalation which will involve boots on the ground and/or destruction of large swaths of another country’s infrastructure, including energy and water desalination capacity.
Does this change? The markets have been remarkably sanguine about the Iranian conflict, reacting to headlines and comments but remaining within a narrow range. The implication is that markets expect a relatively quick end to the conflict. Im nto sure I see how, but tough to fight the tape.
Vice President JD Vance is in Budapest ahead of the election in Hungary to support Viktor Orban’s re-election campaign.
In the US, a thin docket with Weekly ADP Employment, Feb Durable Goods, NY Fed SCE, and Cons Credit. Supply kicks off with a new UST 3y note for $58bn. The Fed speaker calendar includes Williams, Goolsbee, and Jefferson. Canada rounds up the data with Mar Ivey PMI.
KEY THEMESTrump’s 8pm ET deadline for Iran to reopen the Strait of Hormuz is dominating market psychology, with oil trading around $110/barrel for Brent as traders weigh ceasefire signals against escalation risks. Iran has yet to (officially) allow a single LNG carrier to pass through the strait in weeks of war, with two Qatari tankers aborting exit attempts after being denied clearance by Iranian officials.
The geopolitical premium is morphing into a structural repricing event as gold trades near $4,650 after a two-day decline , the dollar strengthens 0.1% , and emerging market assets show tentative recovery with the MSCI EM Index up 1% .
Cross-asset volatility remains elevated as markets fluctuate between risk-on and risk-off positioning ahead of the deadline .
MACRO
President Trump insisted that reopening the Strait of Hormuz must be part of any agreement with Iran, calling it “a very big priority” ahead of tonight’s 8pm Eastern Time deadline .
Iran’s Revolutionary Guards said they are completing preparations to enforce new operating conditions in the strait, warning conditions “will never return to its former state” .
The UN Security Council is expected to vote Tuesday on a watered-down resolution calling for the unblocking of the strait, though the text has been diluted to avoid rejection .
The dollar’s outperformance reflects US dominance as a large energy producer relatively insulated from external shocks, positioning that should shield the currency even if a peace deal emerges . Emerging market currencies rose 0.3%, with the South Korean won and South African rand among top performers .
Brent crude held near $110 a barrel in volatile trading, with WTI at $112.38 . Iran’s semi-official Mehr news agency reported explosions heard on Kharg Island following US-Israeli attacks, briefly pushing Brent back above $111 .
Taiwan will increase coal-fired power generation to bolster energy security as the war crimps gas supplies . Asian refiners are contemplating run rate cuts as dozens of crude tankers remain stranded in the Persian Gulf, with alternative Atlantic Basin barrels carrying prohibitively high freight premiums .
Spot silver collapsed to $72.40, down 0.6% . Gold ETFs added 110,823 troy ounces in the latest session, the fourth straight day of growth . China’s central bank bought 160,000 troy ounces of gold in March, the most in more than a year, extending its buying streak to 17 months .
US crude oil exports are beginning to run up against practical limits as demand for US oil from overseas nears record levels .
North American oil grades from Texas, North Dakota, and Alberta are surging as refiners compete for barrels after weeks of strangled shipments via the Strait of Hormuz, with Bakken oil at Clearbrook, Minnesota shooting up to an $18 premium .
Phillips 66 estimated nearly $1 billion in losses from its short position in oil and related commodity derivative contracts in the first quarter as crude and fuel prices skyrocketed .
Federal Reserve & Monetary Policy
Fed Officials Signal Hawkish Shift: Federal Reserve Bank of Cleveland President Beth Hammack said it might be appropriate for officials to raise interest rates if inflation remains stubbornly high above the central bank’s 2% target . She said she prefers for officials to hold interest rates steady for “quite some time,” but sees scenarios that demand interest-rate moves in either direction . Hammack warned that an interest rate hike could be appropriate if inflation remains persistently above the Fed’s 2% target .
‘Sam Altman May Control Our Future—Can He Be Trusted?
(New Yorker)**Related reading:**The future of global trade won’t depend on the Strait of Hormuz
(FT)Why this oil shock is different (FT)
Sources say Trump sees controlling Iran's energy flows as a way to enhance leverage with China Xi Jinping (
Bloomberg)Trump may postpone military action against Iran if there are signs a diplomatic agreement is within reach (
Axios)Negotiators indicate chances of US agreement with Iran by tonight’s deadline are slim (
link)Iran defiant on eve of Trump’s deadline, continuing attacks on Israel and Gulf states, complicating peace efforts (
Reuters,Bloomberg)Iran urges formation of human chains around power plants as US civilian infrastructure deadline approaches (
AP)Israel warns Iranians to avoid railway network until 9pm local time, signaling potential impending attack on infrastructure (
Bloomberg)Israel strikes petrochemical facility in Shiraz, claiming it’s a key site for explosives and missile components (
Jerusalem Post)Israel approves updated list of energy and infrastructure targets in Iran in case US-led talks fail (
CNN)Pentagon’s revised plans in Iran provide Trump potential defense against war crime accusations (
Politico)US estimates $500M daily cost of equipment losses in Iran war, impacting overall readiness elsewhere (
FT)Trump’s Iran war deepens rift with allies as Europe and Asia face a painful dilemma (
link)Iran’s supreme leader Khamenei reportedly unconscious but receiving medical treatment in Qom (
[London Times](https://nam11.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.thetimes.com%2Fworld%2Fmiddle-east%2Fisrael-iran%2Farticle%2Firan-supreme-leader-mojtaba-khamenei-qom-war-latest-c2th5xgqb&data=05%7C02%7Cphilip.dauber%40bgcg.com%7Cf76d5054cd9f425cd3e708de948e02c6%7Ccfeb5f5e839a44b8ab4647157d8f1241%7C0%7C0%7C639111534842822414%7CUnknown%7CTWFpbGZsb3d8eyJFbXB0eU1hcGkiOnRydWUsIlYiOiIwLjAuMDAwMCIsIlAiOiJXaW4zMiIsIkFOIjoiTWFpbCIsIldUIjoyfQ%3D%3D%7C0%7C%7C%7C&sdata…
