Brad Setser on the War in Iran and the Future of the US Dollar

In this episode of Odd Lots, hosts Tracy Alloway and Joe Weisenthal welcome Brad Setser, Council on Foreign Relations senior fellow, to analyze the geopolitical and financial implications of the escalating conflict in Iran and its impact on global oil markets and the U.S. dollar's dominance. Setser challenges the popular analogy between today’s oil shock and the 1970s crises, noting that while physical disruptions to oil flows are significant—potentially cutting 10–15 million barrels per day from global trade—the price response has been muted compared to past shocks. He explains this divergence through structural factors: oil’s imperfect fungibility, regional refining mismatches, and the fact that Gulf producers like Saudi Arabia and the UAE are not capturing windfalls due to export constraints, while non-Gulf producers like the U.S., Kazakhstan, Nigeria, and Norway are benefiting. Setser also dismantles the myth of a broad 'de-dollarization' trend, arguing that global financial flows remain heavily dollar-weighted—not due to reserve holdings, but because of massive private capital allocations to U.S. equities and the U.S. current account deficit, which forces the world to finance America in dollars. He highlights that even countries like China and Russia, despite reducing visible dollar reserves, still rely on dollar-denominated flows due to currency management and trade mechanics. The discussion extends to the broader implications of 'chokepoint capitalism,' where control over strategic supply routes—like the Strait of Hormuz or semiconductors—has become central to global power dynamics. Setser concludes that while geopolitical tensions are eroding U.S. credibility, the dollar’s dominance persists due to structural economic and financial advantages, not just political will. Key takeaways include: 1) The current oil shock is more physical than price-driven, with non-Gulf producers capturing the benefits; 2) 'De-dollarization' is overstated—global financial flows remain dollar-heavy due to equity investments and U.S. trade deficits; 3) The U.S. dollar’s strength is sustained by structural demand, not just policy; 4) Geopolitical instability is reshaping global trade, with chokepoints becoming new centers of power; 5) Countries facing economic pressure from China’s export dominance (like Mexico and Brazil) are overlooked in mainstream narratives. Despite growing global skepticism toward U.S. foreign policy, the dollar remains resilient due to its entrenched role in global finance and the lack of viable alternatives.