The exchange between the Persian (Arabian) Gulf and the Indian Ocean is investigated using hydrographic and moored acoustic Doppler current profiler data from the Straits of Hormuz during the period December 1996 to March 1998. The moored time series records show a relatively steady deep outflow through the strait from 40 m to the bottom with a mean speed of approximately 20 cm/s. A variable flow is found in the upper layer with frequent reversals on timescales of several days to weeks. The annual mean flow in the near‐surface layer is found to be northeastward (out of the Persian Gulf) in the southern part of the strait, suggesting a mean horizontal exchange with the Indian Ocean that is superimposed on the vertical overturning exchange driven by evaporation over the gulf. The salinity of the deep outflow varies from 39.3 to 40.8 psu with highest outflow salinities occurring in the winter months (December–March). The annual mean deep outflow through the strait is estimated to be 0.15 ± 0.03 Sv. Calculation of the associated heat and freshwater fluxes through the strait yields estimates for the annual heat loss over the surface of the gulf of −7 ± 4 W/m² and an annual water loss (E‐P‐R) of 1.68 ± 0.39 m/yr. These values are shown to be in relatively good agreement with climatological surface fluxes derived from the Southampton Oceanography Centre global flux climatology after known regional biases in the radiative budget are taken into account.