The US and Iran hostilities have escalated again. Since last Tuesday America and Iran have been exchanging fire, after what US Central Command says were Iranian attacks on three merchant ships transiting the Strait of Hormuz. CENTCOM has now conducted four rounds of strikes in a week, including one on Saturday night against roughly 140 targets, and says it has hit more than 300 in three nights. Iran has retaliated against American military sites in Jordan, Qatar, Bahrain, Kuwait and Oman.
The ceasefire deal that brought about stability in the region remains in doubt. Speaking at the NATO summit in Ankara, President Donald Trump declared the ceasefire over. The US Treasury has revoked the licence that allowed Iran to sell crude through August 21st. Neither government however has formally withdrawn from the Islamabad Memorandum of Understanding, and both still have negotiators working on a deal.
Markets have repriced accordingly. Brent crude climbed 3.3% in early Monday trade to $78.50 a barrel, up from a recent trough of $70.14 resulting in a 5.4% gain last week. American crude, on the other hand added 3.4% to reach $73.83. Stock markets slipped across Asia. The US dollar has strengthened along with bond yields as investors now bet on the Federal Reserve increasing interest rates to counteract rising inflation. The headline rate is expected to cool down from 4.2%, by falling fuel prices, though rising crude might undo these expectations.
Gold behaviour throughout this year makes it seem like it has stopped behaving like a safe haven asset. Gold prices fell as much as 1.4% on Monday to near $4,060 an ounce, and it also fell on the day Iranian missiles struck a Qatari LNG carrier. One reason this could be the case is as a result of interest rate expectations in the US. Higher energy prices feed into inflation, and investors are likely betting that the Fed will respond by raising rates. That expectation does two things. It suppresses long-run inflation expectations and since the market believes the central bank will act, nominal yields rising while expected inflation falls will cause real yields go up. Long term government securities, become a more attractive haven than non-interest-bearing assets such as gold, which could partly explain the dip in prices.
Given the current circumstances, it looks like the Strait of Hormuz again is neither open nor closed. Iran’s newly created Persian Gulf Strait Authority says transit is not currently possible; CENTCOM says the strait is open and traffic is flowing. American officials said some 20 vessels had been escorted through in the previous 24 hours, while ship-tracking services showed little movement.
The mediators are working on the sidelines to restore stability in the region. Oman, which has been hosting Iran’s foreign minister to discuss safe passage through the strait, summoned Tehran’s ambassador on Sunday to protest at drone attacks on its own territory. Qatar, which hosts the talks experienced one of its LNG carriers struck by Iranian missiles on July 7th. Pakistan is urging restraint.
What does this mean for Sri Lanka?
The import bill is one to keep an eye on. Fuel cost the island $886m in April and $536m in May, up 112% year-on-year; between January and May it spent $2.7bn on fuel, roughly two-thirds of its entire 2025 oil bill in five months. Additionally, the Rs20-a-litre cut to petrol on July 1st, the first since the war began, came in after global prices eased in the weeks before it. Given that this easing has now reversed what will happen to fuel prices locally will depend on how far global prices climb and for how long. If prices continue to increase as much as they did in March, it will inevitably result in elevated prices at the point of purchase.
The strikes began merely six days ago, making it difficult to pinpoint the implications the Sri Lankan economy may or may not face as a result of this renewed escalation. Whether it does at all depends on things not yet knowable such as whether Oman’s two-route proposal will be accepted by both parties or whether Iranian officials meant it when they privately told Washington the ship attacks were a mistake.