Middle East Tensions Weigh on Asian Currencies

The resurgence of geopolitical tensions in the Middle East is causing significant turbulence in Asian currency markets. Developments such as attacks on shipping lanes in the Strait of Hormuz and the US government's decision to revoke waivers for Iranian oil sales have boosted demand for the US dollar as a safe-haven asset, leading to a weakening of Asian currencies against the dollar. This situation is placing increasing pressure on regional economies and negatively impacting investor sentiment.

One of the primary drivers of this tension is the surge in oil prices due to military actions in the Strait of Hormuz. According to S&P Global analysis, approximately 90% of crude oil shipped through the Strait of Hormuz flows to the Asia-Pacific region. This highlights the region's energy dependence, with over half of Thailand's crude oil imports and around 85% of Vietnam's oil imports originating from the Middle East. The increase in oil prices raises costs for energy-importing Asian nations, negatively affecting current account balances and fueling inflationary pressures.

The market impact of these developments is evident in increased currency volatility across Asia. Currencies such as the Indonesian Rupiah (IDR), Indian Rupee (INR), and Philippine Peso (PHP) have fallen to record lows against the US dollar. The Thai Baht (THB) also reversed its direction, slumping to a 10-month low amidst the Middle East conflict. Central banks like Bank Indonesia have intervened with policy rate hikes and other supportive measures to bolster their currencies, but the Rupiah remains sensitive to higher US yields.

The broader economic context of the Middle East conflict reveals the vulnerability of Asian economies concerning energy security and global supply chains. Rising energy costs could nearly double inflation expectations in the region; the Asian Development Bank (ADB) projects inflation in developing Asia to rise from 3.0% in 2025 to 5.6% in 2026. Furthermore, regional economic growth is also expected to decelerate. The strengthening of the US dollar due to safe-haven demand and expectations of further interest rate hikes by the US Federal Reserve (Fed) are further exacerbating the pressure on Asian currencies.

Analysts and market expectations suggest that Asian currencies will continue to face increased volatility in the near term. MUFG analysts indicate that external pressures will persist, but regional currencies may exhibit divergent performances based on domestic fundamentals and central bank responses. Countries with lower reserve adequacy, particularly in Southeast Asia and South Asia, may be more vulnerable to the combination of high oil prices and a strong dollar. Central banks may need to intervene by selling reserves to manage currency stability, which could lead to a depletion of reserves in the long run.