Asian currencies under pressure as U.S.-Iran conflict boosts dollar

MUFG Research said Asian currencies are likely to remain under pressure against the U.S. dollar as there are 'no credible signs of de‑escalation' in the U.S.-Iran conflict, a dynamic that has reinforced a bias toward dollar strength.

The note highlights that heightened rhetoric from the U.S. and threats to Iranian infrastructure, together with continued disruption to shipments through the Strait of Hormuz, keep oil markets on edge and support a risk‑off backdrop. MUFG also pointed to resilient U.S. labour market data, which has sustained expectations of a 'high‑for‑longer' Fed policy and supported USD carry trades.

Market impact has been visible in both FX and commodity markets: currencies with greater external and energy sensitivities—such as the South Korean won, Philippine peso and Thai baht—look particularly vulnerable, while the Chinese onshore yuan shows relatively more resilience. Oil benchmarks jumped on escalation fears, adding to inflation and current account pressures for energy‑importing Asian economies.

In the broader context, a prolonged energy shock would raise regional inflation and constrain policy space for central banks that face the twin problem of higher import costs and the need to defend currencies. MUFG noted that these forces could widen divergence in regional growth and external balances, even as safe‑haven demand keeps the dollar supported.

Looking ahead, strategists expect elevated volatility until credible signs of de‑escalation emerge; absent such signals, dollar strength and higher oil prices will likely persist as key headwinds for Asian FX. Policy responses—ranging from foreign exchange intervention to macroprudential measures—are potential tools for vulnerable economies, while investors will monitor further geopolitical developments and incoming economic data for shifts in risk sentiment.