Ray Dalio says whoever controls the Strait of Hormuz wins. Here’s why Canadians should pay attention — and prepare for volatility

As of the time of writing, 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 multiple reports indicate there are many obstacles to overcome for traffic to become balanced, and fewer vessels are travelling through the Strait (4). Iran is also pushing to charge tolls for ships to pass through the Strait (5), with the ceasefire already on shaky ground. In another update, as of 10 am on Monday, the U.S. has announced a partial blockade of the Strait and a full naval blockade of Iran’s ports (6), further complicating the matter at hand.

There is “near-universal agreement” that if Iran ultimately controls the Strait of Hormuz, the U.S. “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 (7).

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 (8).

History repeats itself

Dalio gives several historical examples, including the Suez Canal Crisis of 1956 when Egypt challenged Great Britain’s control of this critical trade route — and won. Historians largely consider it the incident that marked the end of the British Empire (9).

It’s a pattern that’s repeated itself throughout history, “in which a perceived lesser power challenges the leading world power over the control of a critical trade route,” Dalio writes.

Whether the dominant power survives or falls, it “reshapes history because people and financial flows quickly and naturally run from the losers.” It will have an impact on “debt, currency and gold markets,” he added.

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 neighbours and the world,” then Dalio says it will reinforce confidence in U.S. power.

But if that doesn’t happen, the fallout could affect everything from global trade to the future of the U.S. dollar.

Potential impacts on the dollar

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 show Iran is already charging transit fees in the Chinese yuan rather than the U.S. dollar (10).

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 U.S. financial sanctions,” Kenneth Rogoff, former chief economist at the International Monetary Fund (IMF), told Al Jazeera (11).

What this means for Canadians at the pump — and at the checkout

Canadians are already feeling the pinch when filling their tanks. Canada imports roughly 500,000 barrels of crude oil per day, with approximately 24% still coming from overseas. primarily into Eastern Canada (10). As a result, ongoing disruption to global supply chains hits Canadian refineries, and ultimately, Canadian consumers.

Higher fuel prices also carry a trickle-down effect on consumer goods, including groceries. Increasing the cost to both produce and transport goods means those costs are passed on at checkout through higher retail prices.

The longer the war lasts and the longer it takes supply chains to recover, 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 (12).

For Canada, that means the Bank of Canada (BoC) could face renewed pressure on its 2.25% inflation target — complicating any plans to further lower interest rates (13).

How to strengthen your finances

In times of economic uncertainty, it’s in your best interests to boost your resilience by ensuring you have enough money set aside in your emergency fund to cover three to six months of expenses — though you may want to put away more if your employment is unstable. The Financial Consumer Agency of Canada (FCAC) recommends keeping that emergency fund in a liquid, accessible account, such as a high-interest savings account (HISA) or a Tax-Free Savings Account (TFSA) (14).