The Persian Gulf is a shallow, semi-enclosed marginal sea where the Persian Gulf Water (PGW), one of the most saline water masses in the world, is formed due to the arid climate. The PGW flushes out of the Persian Gulf as a deep outflow and induces a surface inflow of the Indian Ocean Surface Water (IOSW), driving an inverse-estuarine type water exchange through the Strait of Hormuz. In this dissertation, the circulation and water mass transformation processes in the Persian Gulf and the water exchange with the Indian Ocean through the Strait of Hormuz, in response to the atmospheric forcing, are studied using the HYbrid Coordinate Ocean Model (HYCOM). The model is driven by surface wind stress, heat and fresh water fluxes derived from two sources: the COADS (Comprehensive Ocean-Atmosphere Data Set) monthly climatology and high frequency (2-hourly) MM5 (The Fifth-Generation NCAR/Penn State Mesoscale Model) output. This study is motivated by the time series measurements in the Strait during December 1996 to March 1998 by Johns et al. (2003), which also serve as a major benchmark for evaluating the model results. The simulations with climatological forcing show that the IOSW propagates in two branches into the Gulf, one along the Iranian coast toward the northern gulf and the other one onto the southern banks driven by the Ekman drift by the prevailing northwesterly winds. These two branches of inflow form two cyclonic gyres in the northern and in the southern gulf respectively. Cold, saline deep waters are formed both in the northern gulf and in the southern gulf during the wintertime cooling period and their exports contribute seasonally to the outflow in the strait. After formation in winter, the dense water in the shallow southwestern gulf spills off into the strait and causes high-salinity pulses in the outflow in the strait, a phenomenon also present in the observations. The export of dense waters from the northern gulf persists throughout the year, with the largest cold water export in summer. The intrusion of the IOSW in the model extends much farther into the Gulf in summer than in winter, which is in agreement with observations. By analyzing the salt balance in the basin and conducting sensitivity experiments, we show that it is the balance between the advection of IOSW and vertical upward flux induced by vertical mixing that mainly controls the seasonal variation of the surface salinity. The surface salinity in winter is increased by upward mixing from saltier subsurface waters, which is caused by the strong vertical mixing condition maintained by the surface heat loss. Surface wind stress, which opposes the inflow and is stronger in winter than in summer, plays a secondary role in modulating the seasonal intrusion of the IOSW. The MM5 high frequency forcing, capable of resolving synoptic weather events, leads to increased heat loss in winter, enhanced vertical mixing and higher annual mean evaporation rate. In the simulation with the high frequency forcing, the waters in the gulf are generally about 3 degree C colder and 1 psu fresher than with COADS forcing, and agree better with observations. The high-frequency forcing has little effect on the export of the dense waters from the northern gulf but delays the spillage of the waters from the southern gulf to April. A notable synoptic feature of the simulations is the annual appearance of eddies along the intruding salinity front. The typical sizes of the fully developed eddies in summer are about 100 km, about 3 times of the local Rossby deformation radius, consistent with a baroclinic instability process. The existence of these eddies is confirmed in satellite images of surface temperature in the Gulf