Ray Dalio says whoever controls the Strait of Hormuz wins the Iran war — here’s why

Currently, a fragile two-week ceasefire is in place, and Iran has said it will allow "safe passage" for ships through the Strait, as long as they coordinate with their armed forces. But as the New York Times reports, there are many obstacles to overcome for traffic to normalize, and fewer vessels are traveling through the Strait (4) now than over the past week. Iran is also pushing to charge tolls (5) for ships to pass through the Strait. The ceasefire is also already on shaky ground.

There is "near-universal agreement" that if Iran ultimately controls the Strait of Hormuz, the US "will be judged to have lost the war, and Iran will be judged to have won," according to Bridgewater Associates founder Ray Dalio in his Principled Perspectives newsletter (6).

But there's more at stake than losing control of this critical transit chokepoint, says Dalio. Rather, it's about whether the American-led global order — established after the end of the Second World War in 1945 — actually survives (7).

History repeats itself

Dalio points to several historical examples, including the Suez Canal Crisis of 1956, in which Egypt challenged Great Britain's control of this critical trade route — and won. The incident is largely regarded by historians as the end of the British Empire (8).

It's a pattern that has repeated itself throughout history, "in which a perceived lesser power challenges the leading world power over the control of a critical trade route," Dailo writes.

Whether the dominant power survives or falls "reshapes history because people and financial flows quickly and naturally run from the losers." And this will have an impact on "debt, currency and gold markets," he writes.

If the U.S. is able to "win this war by having free passage through the Strait of Hormuz and eliminating Iran as a threat to its neighbors and the world," then Dalio says it will bolster confidence in US power.

But if not, the ripple effects will impact everything from trade flows to the dollar's reserve currency status.

Potential impacts on the greenback

If the world's dominant power, which holds the world's reserve currency, is "overextended financially," a loss of both military and financial control "reveals its weakness," writes Dalio. "Watch out for allies and creditors losing confidence, the loss of its reserve currency status, the selling of its debt assets and the weakening of its currency, especially relative to gold."

We're already seeing potential impacts. While only a trickle of commercial vessels have been allowed passage through the strait, multiple reports indicate Iran is already charging transit fees in yuan (China's currency) rather than the U.S. dollar (9).

If Iran (and China) prevail, "it will encourage countries to diversify away from the dollar financial system so as to protect themselves from being held hostage to US financial sanctions," Kenneth Rogoff, former chief economist at the International Monetary Fund (IMF), told Al Jazeera (10).

How to shore up your finances

Already, Americans — and people around the world — are feeling the pain at the gas pump. But higher fuel prices also have a trickle-down effect on consumer goods, including groceries. By increasing the cost to both produce and transport goods, those costs are passed onto consumers through higher retail prices.

The longer the war lasts — and the longer it takes to reboot oil supply chains — the more it could drive higher inflation and potentially even stagflation. Even if the strait fully reopens, oil prices could remain high for months or even years because of infrastructure damage to refineries, oil fields, gas plants and ports in the Middle East (11).