In the latest edition of My Thoughts on Currencies, Stephen Jen examines the market implications of the Iran War, arguing that the conflict may have more lasting geopolitical consequences than economic ones.
Stephen’s base case is that the U.S. is likely to take an early off-ramp from military operations, which would leave the shock primarily inflationary rather than recessionary. In that scenario, he sees scope for risk assets to recover, supported by an underlying global economy that remains more resilient than many investors assume.
As Stephen writes:
“The underlying global economy is immensely robust. It would take a very large energy shock to push the global economy into a recession, I think.”
A central theme of the note is that today’s oil shock should not be judged by historical nominal price levels alone. Stephen argues that the world is less reliant on hydrocarbon energy than in previous decades, making the same dollar oil price less economically damaging than it once was.
He writes:
“I’ve made the point previously that ‘100 is the new 50’, i.e., USD100 a barrel today is, adjusting for inflation and the reduction in our consumption of hydrocarbon fuels, equivalent to around USD50 pre-GFC.”
The note also places the Iran War in the context of a broader “K” dynamic in the global economy. The energy shock represents the lower leg, while the technology race, AI investment and associated capital expenditure represent the upper leg. Stephen argues that this distinction matters for markets, because the AI-driven investment cycle may continue even if energy prices remain elevated.
The dollar is also central to the analysis. Stephen notes that the dollar’s recent rally has validated the left side of his “Dollar Smile” framework, but he also sees the move as relatively modest given the scale of the shock.
As Stephen writes:
“The dollar has indeed rallied as a safe haven, validating the left side of the Dollar Smile.”
The note concludes that if the more benign scenario plays out, risk assets may be undervalued, the dollar’s structural decline could resume, and non-dollar currencies including the RMB and JPY may become more important drivers of the next phase of the currency adjustment.
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