Outlook: Is Your Spidey Sense Tingling?

The Strait of Hormuz has been effectively closed now for 27 days with no obvious path to reopening it anytime soon. With around 15 million barrels a day of lost global supply, the world oil market is now short roughly 400 million barrels. This is equivalent to the total strategic reserve releases among all IEA countries that are expected to take another three to four months to fully get to market. While there seem to be some back-channel negotiations between Iran and the U.S., both sides appear publicly far apart while maintaining threats of escalation.

The U.S. reportedly proposed a 15-point plan to end the war that included: reopening the Strait of Hormuz, limiting Iran’s ballistic missiles, and stripping Iran of all nuclear capabilities and facilities in return for lifting Iranian sanctions and helping Iran with civilian nuclear power. In response, Iran set 5 conditions, including: a complete halt to aggression and assassinations; firm assurances that war is not reimposed; payment for damages and reparations; an end to the war across all fronts and all groups in the region; and, lastly, guarantees of Iran’s sovereignty over the Strait.

Meantime, inflation expectations eased this week on investors’ glass half-full view of the negotiations (Chart 1). The 2-year Treasury break-even rate fell 12 bps from last Friday’s peak. Thursday’s Truth Social post by President Trump stated that talks are going “very well” and, per the Iranian government’s request, he is pausing attacks on energy plants for 10 days (to Monday, April 6 at 8 pm ET). But, if this was the Marvel universe, my spidey sense would be tingling. I’m concerned that unwarranted complacency may be creeping back into financial markets.

Evidence continues to mount that the gasoline price shock could be significant for consumers. Average retail gasoline prices rose 22% in March; and, if prices remain at current levels of around $3.98 per gallon, we have another 13% increase for April already baked into the cake (Chart 2). It doesn’t help that the U.S. is approaching the point in time when more expensive blends of gasoline and the summer driving season naturally drive prices higher. The March increase alone is bigger than the initial response from the Ukraine war in 2022. During the first five months of that war, U.S. gasoline prices increased a cumulative $1.70 (or 56%) to a peak of $5.01 per gallon (Chart 3). Note it was a prolonged multi-month shock, not just a one-month-and-done affair.

The closure of the Strait of Hormuz is the biggest global oil supply shock the world has ever seen: it has already shuttered roughly 10% of daily crude production, while the Ukraine war initially disrupted only around 3%. Even the early-1970s OPEC oil embargo—which triggered a 16-month U.S. recession and pushed both inflation (+4.5 ppts) and the jobless rate (+4.4 ppts) up—reduced global oil supply by around 7%. In short: if prolonged, the current shock could be the mother of all energy price shocks. Very little of this risk appears priced into financial markets. The S&P 500 is only down a little over 7% over the past month with stock volatility (measured by the VIX) at a surprisingly low 27.4. For comparison, post ‘Liberation Day’, the S&P 500 fell 12% and the VIX peaked at a much higher 52.3. Also, not a peep from high-yield corporate credit spreads that remain not far from historical lows (Chart 4). Markets are sounding the all-clear on the Western front while the war for control of the world’s energy supply rages on. I hope markets are right on this one, but my spidey sense continues to twitch.

Tales from the Tariff Trenches

The Administration is scrambling to find replacements for IEEPA tariffs that were ruled unlawful. The alternatives will likely come up short over time.

In February, the Supreme Court ruled that tariffs justified by the International Emergency Economic Powers Act of 1977 (IEEPA) were unlawful. Up until then, this had been the basis for most of the duties introduced by the Trump Administration: the ‘fentanyl’ tariffs on Mexico, Canada, and China; the country-specific ‘reciprocal’ tariffs on scores of others, the 10% global base tariff, along with the ‘geopolitical’ tariffs on Brazil and India. IEEPA was embraced by the Administration because tariff actions did not require formal investigations or congressional oversight, and many situations could be construed as an international economic emergency.

In his post-ruling press conference, the President cited all the ‘lawful’ tariff remedies that had been and continue to be available. “Those statutes include, for example, the Trade Expansion Act of 1962, Section 232—all of these things I know so well—the Trade Act of 1974, Sections 122, 201, 301, and the Tariff Act of 1930, Section 338.”

In the past month or two, there have been developments on four of these five tariff fronts. The 96-year-old duties—the infamous Smoot-Hawley tariffs—have been left alone. Below we briefly survey what has been happening.

Section 122

This section gives the President the authority to impose tariffs when it is determined (by the President) that there are “fundamental international payments problems.” The tariffs can be as high as 15% and last as long as five months, although Congress can extend them.

The Trump Administration announced (on February 20, the day of the ruling) that effective February 26 (and until July 26), a 10% Section 122 tariff would be imposed, with lots of country and product exemptions, along with threats it could be raised to 15%. The action was expected, but was still controversial.

Section 122 tariffs have never been used before. This is because the balance of payments problems envisioned by the legislation have not existed (for the U.S.) since the shift to a floating exchange rate regime in March 1973 [1]. Nevertheless, the President’s Proclamation asserted that one existed, pointing to a deteriorating current account balance among other things.

The current account is a measure of the balance of international payments, and it has four key components (the figures refer to the four quarters ending 2025 Q4) (Chart 1). First are the familiar goods trade balance, with its $1.24 trillion deficit (or net payments), and the services trade balance, with its $329 billion surplus (net receipts). Next is the primary income balance that generates net receipts of $10 billion (surplus). This includes the returns on investment (interest, dividends) and labor (wages). Finally, there is the secondary income balance that generates net payments of $217 billion (deficit). This includes things like remittances and foreign aid.

The goods trade deficit is the largest contributor to the current account shortfall, with both balances rebounding from their record deficits hit in 2025 Q1 (due to tariff front-running). However, one reason America has a record-sized trade deficit is because it has a record-sized economy. As a share of GDP, the goods trade deficit has been somewhat stable over the past 10 to 15 years, not too far off the latest reading of 4.0%. Both the services trade surplus and secondary income deficit have also remained relatively stable as a share of GDP. However, the current account deficit has deteriorated relative to the trade shortfall in recent years, due to the deterioration in the primary income balance. During 2025, the four-quarter tally turned negative for the first time ever. This, in turn, reflects the mounting interest payments on Treasury securities to foreign investors.

The rough mirror image of the current account is seen in the financial account. The latter tallies the outbound and inbound flows of direct, portfolio and other investments. The financial account has a positive balance when there are net outflows… when the U.S. is net acquiring assets or is net lender in the global economy. The financial account has a negative balance when there are net inflows… when the U.S. is net incurring liabilities or is a net creditor in the global economy. A current account deficit means there is a net outflow of payments due to trade and income flows. This, in turn, is ‘balanced’ by a financial account ‘deficit’ which means there is a net inflow of foreign investment. From this perspective, America’s strong ability to attract foreign investment, something the Administration often touts and encourages, is indicative of the economy’s ability to sustain a large current account deficit. So, no problem here.

In an election year with affordability a critical issue, we doubt Congress will extend the Section 122 tariffs past July 26. In the meantime, the tariffs are already being challenged in the U.S. Court of International Trade, on two issues. First, there are too many country and product exemptions. The law allows some, but there must be “broad and uniform application” of the duties. Second, fundamental international payments problems do not exist in the current situation. America has absolutely no problem attracting sufficient net foreign investment to cover its current account deficits.

Section 201

This section gives the President the authority to impose tariffs as a ‘safeguard’ measure, to temporarily protect a domestic industry from foreign competition. This is designed to give an industry time to restructure so that it can eventually compete effectively against imports. The tariffs tend to remain in place for up to four years, but they can last as long as eight years. These were the first tariffs introduced during the first Trump Administration, on imported solar panels and washing machines in February 2018,

No new Section 201s have been announced. Instead, there was the news that the duties on solar panels, in place for eight years after being extended during the Biden Administration in 2022, had expired on February 6, 2026. (The washing machine tariffs expired in February 2023, after their original three-year life was extended by two years.)

Section 232

This section gives the President the authority to impose tariffs on imports that “threaten to impair the national security,” with national security defined broadly to include “the general security and welfare of certain industries, beyond those necessary to satisfy national defense requirements, which are critical to the minimum operations of the economy and government.” The determination is made via an investigation by the Bureau of Industry and Security (BIS), part of the Commerce Department. Once an investigation has been initiated, the BIS has up to 270 days to prepare a report with recommendations for the President, and the President has up to 90 days to take any action. So, it can take as long as a year from initializing investigations to instituting tariffs.

The two reports covering steel and aluminum from 2018 (which were acted on at the time) and the one covering automobiles and parts from 2019 (which was not acted on at the time) were dusted off last year. This set a precedent because no old or lapsed reports had been acted on before. There were new actions on both fronts (Table 1). And as last year unfolded, 12 new Section 232 investigations were initiated. The reports are slowly being acknowledged and acted on (or not), although there is a veil of secrecy surrounding the investigations, reports and actions because of their national security considerations.

There have been no new investigations launched since September 2, 2025. The latest actions on completed reports were announced on January 14, 2026. The investigation on semiconductors and semiconductor manufacturing equipment (initiated April 1, 2025) resulted in 25% duties on select chips and more industry oversight (and involvement). The investigation on processed critical minerals and derivative products (initiated April 22, 2025) resulted in no tariffs but more industry oversight.

Section 301

This section gives the Office of the United States Trade Representative (USTR) the authority to impose tariffs if it determines that “an act, policy, or practice of a foreign government… is unjustifiable and burdens or restricts United States commerce.” It is a remedy for unfair trade practices. The USTR typically takes about one year to make its determination after an investigation starts.

In the wake of the Supreme Court ruling, two new Section 301 investigation were initiated. On March 11, one was launched into the practices of 16 countries/regions “relating to structural excess capacity and production in certain manufacturing sectors [2].” It was asserted that “key trading partners have developed production capacity untethered from the incentives of domestic and global demand.” Then, on March 12, another was launched into the practices of 60 countries/regions “related to the failure to impose and effectively enforce a prohibition on the importation of goods produced with forced labor [3].”

These add to the two ongoing investigations initiated last year. The first was launched on July 15 to investigate an array of Brazil’s trade practices. The second was launched October 24 to investigate China’s implementation of its commitments under the ‘Phase One’ Agreement (from 2019).

Tariffs’ take

Apart from triggering new tariffs and investigations, the Supreme Court’s ruling also triggered a clamoring for refunds of paid IEEPA tariffs. U.S. Customs and Border Protection (USCPB) is currently completing an online claim portal to manage the volume: more than $166 billion (plus interest totaling $23 million per day according to some estimates) to over 330,000 importers of record.

From February 1, 2025, when new tariffs first started, until the end of February 2026, a total of $311 billion was collected (Chart 2). Deducting the IEEPA amount (~$166 billion) and the amount from pre-2025 duties (roughly $94 billion over the past 13 months), results in just over $50 billion worth of other new tariffs. The latter amount appears destined to rise, particularly through the end of July, but the tariff run rate looks likely to come in well below where it was before. In its latest fiscal projection (February 11), the Congressional Budget Office assumed tariff revenue would average $400 billion per annum over the coming decade. It is now looking like it could be roughly half that amount, which will tack on another $2 trillion to the 10-year deficit and public debt.

America’s tariff narrative is in a state a flux, which has been the case for the past 14 months. This is not going to change any time soon. However, at least the intensity of the situation is less than what it was last spring.

[1] Under the previous fixed exchange rate regime (the Bretton Woods System) in which the U.S. dollar maintained a fixed conversion rate with gold ($35/oz) and other countries maintained a fixed exchange rate with the U.S. dollar, a profound international payments problem emerged through the early 1970s. There was pressure for the U.S. dollar to depreciate due to deteriorating budget and trade deficits (owing, for example, to Vietnam War spending and expanding social programs), but it could not do so. This led to countries requesting that their growing holdings of U.S. dollars be converted into gold (a loss of confidence in the greenback), which led to a drain of America’s gold reserves. In August 1971, President Nixon announced the temporary suspension of the dollar’s convertibility into gold, which began the end of the fixed exchange rate regime. [^]

[2] The list includes China, European Union, Singapore, Switzerland, Norway, Indonesia, Malaysia, Cambodia, Thailand, Korea, Vietnam, Taiwan, Bangladesh, Mexico, Japan, and India. [^]

[3] The list includes Algeria, Angola, Argentina, Australia, The Bahamas, Bahrain, Bangladesh, Brazil, Cambodia, Canada, Chile, China, Colombia, Costa Rica, Dominican Republic, Ecuador, Egypt, El Salvador, European Union, Guatemala, Guyana, Honduras, Hong Kong, India, Indonesia, Iraq, Israel, Japan, Jordan, Kazakhstan, Kuwait, Libya, Malaysia, Mexico, Morocco, New Zealand, Nicaragua, Nigeria, Norway, Oman, Pakistan, Peru, Philippines, Qatar, Russia, Saudi Arabia, Singapore, South Africa, South Korea, Sri Lanka, Switzerland, Taiwan, Thailand, Trinidad and Tobago, Turkey, United Arab Emirates, United Kingdom, Uruguay, Venezuela, and Vietnam. [^]

First Among Equals: The Dollar’s Reserve Role After Liberation Day

Since ‘Liberation Day’ last year, the role of the U.S. dollar in the international monetary and financial system (IMFS) has come under sharper focus. Markets have questioned whether the administration’s disorderly policy environment would lead global reserve managers to reduce dollar holdings.

The latest data from the IMF’s Currency Composition of Official Foreign Exchange Reserves (COFER) confirm that while the dollar share of currency reserves fell to around 56.8% in 2025Q4 (down 1.7 ppts y/y)—its lowest level in decades—it remains very much first among equals in global reserve portfolios.

Including gold in total reserve assets does little to alter this conclusion. While gold’s share (at market value) rose to roughly 24.5% by end-2025—reflecting both central-bank purchases and a sharp rise in prices—the dollar still accounts for about 42.9% of total reserves. Importantly, most of gold’s recent ascent reflects valuation effects, as gold volumes are only around 3% higher than at end‑2022.

Adjusting reserve holdings for valuation effects further dampens the appearance of USD weakness. On an exchange‑rate‑adjusted basis, the dollar’s share still stood near 57% at end‑2025—about 1.5 ppts higher than at end‑2024, when the trade‑weighted dollar was near an all‑time high.

Looking across currencies, the modest diversification away from the dollar has not been evenly distributed. The euro has seen a small uptick in its share of currency reserves, rising to 20.2% by end‑2025 (up 1.3 ppts y/y). This should be viewed as something of a consolation prize, with the euro’s share still well below its 2009 peak. Still, the increase does suggest that renewed interest in European assets post‑Liberation Day has been reflected, at the margin, in reserve allocations.

The other members of the traditional ‘Big Four’—the Japanese yen and the pound sterling—have not benefited from the dollar’s modest retreat, with their shares essentially unchanged. Instead, the other beneficiaries have been non‑traditional reserve currencies. While the Canadian dollar has seen little renewed interest—still accounting for around 2.5% of reserves—Scandinavian currencies, the Singapore dollar, the New Zealand dollar, and South Korean won have gained ground. As a group, the other currencies category rose by 0.9 ppts over the past year to 6.1% of reserves, likely reflecting lower trading costs, improved liquidity, and favorable return characteristics.

Notably, despite talk in recent years about the BRICS pursuing alternatives to the dollar, the Chinese renminbi has failed to make meaningful inroads. Its share of global reserves has remained roughly unchanged at around 2%, with geopolitical risk and relatively unattractive returns continuing to weigh on its appeal.

Taken together, the latest COFER data underscore that, amid heightened risk-off sentiment following the conflict with Iran, the reserve asset of choice remains the greenback, reinforced by its roughly 2% appreciation since February 27. A more material erosion of the dollar’s reserve role would require a sustained weakening of U.S. alliances or its safe-haven status—neither are evident in the data.

To borrow from Heraclitus, change may be the only constant, but the COFER data suggest that any change in the IMFS will remain gradual, constrained by the lack of credible alternatives to the depth, liquidity, and safety of the Treasury market.