Investors have learned that Donald Trump can quickly change course under political or market pressure. But a week after the United States and Israel launched missile strikes on Iran, concerns are growing that the conflict could last longer than expected. The war has already triggered a worst-case economic scenario for the Middle East: the closure of the Strait of Hormuz. About one-fifth of the world’s oil and gas supplies pass through this route. Since the strikes began, global benchmark oil prices have surged 17 percent to over US$85 a barrel, sending shock waves through financial markets. Australia’s sharemarket has avoided the worst of the impact but still recorded a 3.8 percent drop for the week. Asian markets, particularly those dependent on imported energy, suffered more. South Korea’s stock market fell 13 percent in a single session, marking its worst day in history. Wall Street’s S&P 500, by contrast, lost less than 1 percent heading into Friday’s close. The Trump administration has considered using America’s strategic oil reserve to ease price pressures. Shane Oliver, chief economist at AMP, said markets may be underestimating the risk. “The mildness of the response has surprised me,” he said. Oliver noted that investors are expecting Trump to back down, as he has done in previous crises, especially during tariff disputes. The main challenge for investors is that it is unclear why Trump started the war or what will be needed to end it. Markets are priced for a sharp but short conflict, perhaps two to three weeks, rather than a months-long war. The Australian dollar has stayed above 70 US cents, reflecting some investor calm. Ray Attrill, head of foreign exchange strategy at National Australia Bank, said Australia’s status as a major energy exporter helps cushion the impact. “With oil prices in the 80s, the assumption is that oil will resume flowing through the Strait of Hormuz soon, and the disruption won’t last long,” he said. Derivatives markets suggest oil could return to US$60–70 a barrel within a month. But if the conflict drags on, prices could hit US$90–100, which would likely trigger a major market sell-off. Higher oil prices have a stagflationary effect. They push inflation higher while slowing economic growth, putting central bankers in a difficult position. They must choose between raising rates to control inflation or easing policy to support growth. This situation is not as severe as the 1970s, when oil shocks caused double-digit inflation and unemployment in Australia. Still, the current conflict has pushed economists to adjust forecasts. NAB predicts inflation could peak at 4.75 percent in the year to June, about half a percent higher than expected before the Iran war. If oil reaches US$100 a barrel, inflation could rise above 5 percent, the highest since late 2023. Reserve Bank governor Michele Bullock warned that rising petrol prices could make high inflation expectations stick, complicating efforts to control price pressures. She noted that temporary price shocks are usually manageable, but this situation could be more challenging. Investors are cautious. Brett Solomon, a senior portfolio manager at QIC, said recent geopolitical events have usually lasted a week, which has made markets complacent. But this war could last longer, and that may change market behavior. Solomon predicts one more RBA rate hike in May but is monitoring oil prices closely. Kerry Craig, a global strategist at JP Morgan, said most investors still expect a short conflict. The global economic outlook remains stable unless the war drags on, which could push economies toward recession.