Asian Currencies Slip as Oil Shock Tests Fundamentals

Asian currencies have faced heightened swings in the first half of the Year of the Fire Horse, as geopolitical tension and oil-price shocks disrupted the market outlook that earlier in the year seemed poised for a steady appreciation.

Geopolitical shock fuels volatility

After a constructive start, the conflict between the United States and Iran at the end of February sent oil prices soaring. The spike raised inflation expectations across the region and strained external balances, especially for economies reliant on imported energy.

The surge in commodity costs weighed on local-currency bonds and dampened investor appetite for regional assets. While many emerging-market peers in Latin America benefited from their commodity-export status, Asian currencies broadly lagged behind their peers.

Divergent performance across the region

Investors turned wary of higher oil-import bills and limited fiscal space, putting pressure on the Philippine peso, Thai baht and Indian rupee. The heightened risk sentiment amplified country-specific concerns, such as Indonesia’s fiscal outlook under President Prabowo, which intensified outflows from the Indonesian rupiah.

In contrast, the Korean won experienced pronounced swings despite strong external fundamentals, including AI-driven export growth and a healthy current-account surplus. Equity-market outflows and outbound investment by domestic players kept the won under pressure until a sharp recovery began in July, aided by policy encouragement for exporters to convert foreign earnings.

The renminbi showed a steadier trajectory, appreciating over the period as policymakers signaled a preference for a stronger currency.

Compared with the 2022 energy-price shock, which saw Asian currencies fall an average of 12% from peak to trough, the current decline is modest—about 4.5%. This suggests markets are repricing risk rather than entering a broad-based stress episode.

Fundamental buffers remain largely intact. Current-account positions are expected to stay solid, supported by continued strength in technology and AI-related exports. Malaysia, South Korea and Taiwan are projected to post larger surpluses this year than last.

Foreign-exchange reserves also stay robust.

The IMF’s reserve-adequacy framework indicates most Asian economies sit comfortably above recommended levels. The Philippines and India rank among the strongest, while India and South Korea hold reserve stockpiles of roughly $700 billion and $400 billion, respectively.

The Reserve Bank of India’s concessional swap facility, introduced to hedge three- to five-year FCNR(B) deposits, attracted $52.3 billion in inflows as of 13 August, prompting the RBI to close the window a month early.

Policy measures to stabilize currencies

Central banks across the region have turned to a mix of foreign-exchange intervention and targeted liquidity tools. South Korea, for example, broadened the National Pension Service’s hedging flexibility and urged exporters to convert earnings more quickly.

Other economies have introduced similar initiatives to broaden foreign-currency inflows. Measures encouraging domestic investors to increase currency conversion and hedging activity have been paired with steps to improve foreign investor access to on-shore markets. While the exact design of these programmes varies, the common goal is to offset persistent currency weakness and support external financing conditions.

Initial Forecasts and Ongoing Uncertainty

Stronger trade balances and shifting capital-allocation patterns could challenge years of U.S. dollar dominance. The “Double Fire” theme implied that any rise would likely bring heightened volatility and market swings.

Outlook and investment opportunities

Looking ahead, the expectation is that macroeconomic headwinds will ease if geopolitical tensions subside. A less volatile risk environment should allow underlying fundamentals, such as strong technology and electronics exports, to exert greater influence on exchange-rate trajectories.