Trump and Xi will eventually reopen the Strait of Hormuz, and when they do the dollar goes lower, predicts this strategist

By Jules Rimmer

London-based economist Daniel Lacalle believes that, sooner or later, the Americans and the Chinese will work in tandem to resolve the blockade, because the costs to all sides otherwise will become prohibitive.

All the problems the world is facing right now, as a consequence of events in the Middle East, are leading to the point at which U.S. President Donald Trump and Chinese leader Xi Jinping will be forced to reach an agreement over the Strait of Hormuz "before things get nasty."

When they do, and Iran halts its nuclear program and the strait is reopened to traffic, "I can guarantee you the dollar index DXY goes to 96," economist Daniel Lacalle said in a "MacroVoices" podcast that aired Thursday.

The other bet he's making is that "oil prices (BRN00) have already reached the top" and will fall gradually, even if a more permanent geopolitical-risk premium means they won't decline to their prewar levels.

Economist and author Daniel Lacalle is a fund manager at Tressis Gestion.

The London-based Lacalle is a well-known Spanish economist and a fund manager at Tressis Gestion, running almost EUR1 billion of client money. Discussing the Iran war and its impact on world markets and economies, he touched on energy prices, inflation, gold (GC00) and the dollar.

The starting point for all of this is a three-way standoff among the U.S., Iran and Iran's ultimate backer, China, he says.

The issue, Lacalle argues, is that all of the above parties are playing a game of chicken. Trump thinks he's a net exporter of oil and can hold out under high gasoline prices, the Islamic Revolutionary Guard Corps in Iran doesn't care what suffering it imposes on the Iranian population, and China thinks itself partially insulated by having stockpiled commodities intensively beforehand.

The costs borne by all parties will eventually force them to come to "an agreement that sort of wraps the trade war and the Iran war," the money manager says.

Lacalle expects prices will end the year lower than at present, citing the huge backwardation of crude futures, which suggest prices will be lower going forward. He says "every day, every week that passes, the system is adapting on both the refinery level and the supply of oil," and the lack of a geopolitical risk premium in oil in the last three years was an abnormality rather than the rule.

Lacalle proposes that the recent weakness in gold (GC00) - it's roughly 20% below an all-time high from earlier this year - is attributable to an unwinding of long-gold and short-dollar trades when the dollar started to rebound as hostilities commenced in the Gulf region. Central banks have also sold gold, he thinks, to support their currencies and offset their higher energy-import bills.

Lacalle doesn't foresee current dollar strength persisting, and the catalyst for a selloff would be a settlement to end the war and open up the strait to shipping.

When it comes to stocks, we're "going to continue to see equity markets doing pretty well," Lacalle says. "Money-supply growth is soaring, faster than at any time since 2021," and so asset prices in financial markets are "discounting the destruction of purchasing-power parity of their currency." (In higher-inflation environments, investors typically buy real assets, commodities and stocks to protect capital.)

Energy prices overall will sustain inflationary pressures, Lacalle warns, including, most disconcertingly, in food prices. This results directly from the jump in fertilizer prices caused by disruptions in the Strait of Hormuz.

-Jules Rimmer

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

05-01-26 0924ET