Odd Lots: Setser on the Future of the US Dollar (Podcast)

The article flags that the war in Iran could disrupt global financial flows, energy markets, and the US dollar’s role in the international system. Potential consequences include higher risk in Gulf business activity, a tollbooth effect at the Strait of Hormuz, and accelerated de-dollarization pressures. It also highlights a split for East Asia: rising energy import bills alongside a windfall from AI chip exports.

Analysis

The market is underpricing the possibility that a Middle East shock becomes less about spot oil and more about persistent changes in settlement behavior, routing, and reserve preference. If shipping, insurance, and invoice currency choices shift even modestly, the first-order effect is higher energy import bills, but the second-order effect is a re-pricing of trade finance and working-capital demand across Asia and the Gulf. That favors USD liquidity in the near term, even if the strategic narrative becomes more “de-dollarization.”

The most interesting setup is not a clean risk-off move; it is a cross-current. Energy exporters with large external surpluses may see inflows, but jurisdictions perceived as more exposed to geopolitical logistics risk can get a lasting discount in capital allocation, tourism, and foreign direct investment. Meanwhile, AI-linked Asia could be forced into a “good revenues, bad terms of trade” regime: chip exporters still earn, but the energy-import tax acts like a margin wedge that can cap equity multiples even before earnings estimates roll over.

Consensus may be too quick to equate higher geopolitical risk with a weaker dollar. In the short run, war-driven demand for USD funding, hedging, and safe assets can dominate any long-run reserve diversification story. The bigger medium-term risk is not a sudden collapse in dollar primacy; it is a slow fragmentation of payment rails that raises transaction costs, embeds higher FX volatility, and benefits firms and countries with balance-sheet flexibility while punishing import-dependent EMs and levered cyclicals.

The cleanest catalyst watch is whether markets move from pricing a transient shipping shock to pricing structural rerouting or tolling at strategic chokepoints. If that happens, the inflation impulse can persist for multiple quarters, which matters more for curve shape and FX than for one-off oil spikes. Until then, the base case is a volatility regime shift rather than a durable directional commodity supercycle.

Key Decisions for Investors

• Long USD vs a basket of energy-importing Asian FX via DXY calls or JPY/KRW/TWD downside hedges for the next 1-3 months; risk/reward favors the dollar if funding demand rises faster than reserve diversification.
• Short EM external-sensitive credits/equities tied to imported energy and weak balance sheets; use 3-6 month puts on high-beta importers where higher freight/insurance costs can hit margins before demand data deteriorates.
• Long LNG/shipping/insurance beneficiaries on any selloff, but keep exposure tactical and event-driven; the trade works best if routing disruption persists beyond a few weeks rather than resolving immediately.
• Pair long US mega-cap AI beneficiaries with short Asian hardware names more exposed to energy cost pass-through over 1-2 quarters; the spread is attractive if revenue growth is intact but margins compress.
• Avoid fading the dollar too early; if markets become worried about payment rails and safe-haven demand, any short-USD position has asymmetric near-term drawdown risk despite long-run de-dollarization headlines.