Asian currencies face pressure as Middle East conflict pushes oil above $91

Asian currencies face pressure from an escalating US-Iran conflict that has pushed Brent crude above $91 and driven safe-haven demand for the dollar.

Asian currencies consolidated against the dollar in early Asian trading but face weakening pressure as an escalating US-Iran conflict undermines risk appetite and pushes Brent crude to its highest level in more than a month.

"The combination of rising geopolitical risk and higher oil prices is a double negative for Asian currencies, which tend to weaken when risk appetite deteriorates," said Marc Chandler, a veteran currency strategist and founder of Marc to Market.

Brent crude rose as much as 3.8% to over $91 a barrel, the highest since June, after US and Iranian attacks escalated over the weekend, according to Bloomberg data. The dollar strengthened against most major peers as investors sought safe-haven assets, while US President Donald Trump called for Iran to be included in sanctions legislation against Russia. The US two-year yield fell nearly eight basis points last week after softer-than-expected CPI and PPI data, though the geopolitical shift has since reversed some of that dollar weakness.

The Strait of Hormuz handles about 21% of global oil trade, and any disruption to shipping through the waterway could push crude prices higher, further pressuring Asian economies that are net oil importers. A sustained rally in oil would widen current account deficits across the region and force central banks to choose between supporting currencies and maintaining growth.

Oil's Rally Compounds Currency Headwinds

The jump in crude prices adds a new layer of pressure on Asian currencies that had already been navigating a complex macro environment. Last week, the dollar fell against all G10 currencies except the yen after softer-than-expected US inflation data, with the US two-year yield dropping nearly eight basis points. That reprieve now appears short-lived as the geopolitical premium reasserts itself, with the dollar index reversing some of its recent losses.

For Asian emerging-market currencies, the dynamic is particularly challenging. Higher oil prices increase import costs for net consumers such as India, South Korea and Thailand, widening trade deficits and putting downward pressure on exchange rates. The Indian rupee and Thai baht are among the most oil-sensitive currencies in the region, according to historical correlation data compiled by Bloomberg. South Korea's won, which has already weakened 4% against the dollar this year, faces additional headwinds from both higher energy costs and reduced appetite for riskier assets. The Philippine peso and Indonesian rupiah are also vulnerable, given their countries' reliance on imported fuel for power generation and transportation.

A Broader Escalation Looms

Trump's call to include Iran in sanctions legislation against Russia, posted on Truth Social on July 19, points to the potential for a broader escalation that could keep risk premiums elevated for longer. The last time US-Iran tensions escalated to a comparable degree, in January 2020, Brent crude spiked above $70 and emerging-market currencies weakened by an average of 1.5% against the dollar over the following two weeks, according to data compiled by Bloomberg. The current conflict has already driven oil above $91, suggesting the currency impact could be more pronounced given the higher starting point for crude prices.

Markets will be watching for any disruption to shipping through the Strait of Hormuz, through which about 21% of global oil consumption transits daily. Any sustained interruption could push oil toward $100, a level that historically has triggered significant capital outflows from Asian emerging markets. The Korean won and Indian rupee are particularly vulnerable given their countries' reliance on imported crude, with India importing about 85% of its oil needs and South Korea virtually all of its supply. Central banks in the region may face a difficult choice: raise interest rates to defend their currencies at the expense of economic growth, or allow depreciation that fuels imported inflation.

This article is for informational purposes only and does not constitute investment advice.