The Indian rupee and Philippine peso fell to record lows. Japan and South Korea have spent billions propping up their currencies to avoid the same fate. The Indonesian rupiah is weaker today than it was at the height of the Asian financial crisis.
For Asian countries that rely heavily on imported energy, the war in the Middle East has already caused oil prices to skyrocket. Today, they face a ripple effect that has turned into a full-blown crisis: falling currency values, hit by rising fuel prices and nervous investors fleeing to the safety of the U.S. dollar.
To stem this slide, Asia’s central banks have repeatedly intervened in foreign exchange markets, drawing on foreign exchange reserves they had accumulated over the years for precisely this kind of moment.
These interventions, which consist of selling dollars and buying local currencies, have avoided a real free fall. But with no end to the war in sight, concerns are growing about the long-term costs of ending the crisis, particularly over how long central banks can continue to deplete their reserves if import prices continue to rise.
“At what rate of reduction in reserves does the argument “We have significant reserves” start to lose its reassuring character? asked Sana Ur Rehman, financial markets analyst at EBC Financial Group.
Ordinary citizens across Asia are beginning to feel the effects of weakening currencies, particularly in countries hardest hit by the energy shock, including India, Indonesia and the Philippines. When currencies weaken, imports – from fuel to food – become more expensive. These rising prices tend to hit poorer families hardest, as they spend more of their income on basic necessities.
Limiting traffic in the Strait of Hormuz, a key shipping route for oil and gas flowing out of the Persian Gulf, has driven oil prices up nearly 50 percent since the start of the war. Brent crude, the global oil benchmark, is trading around $105 per barrel.
Asia remains very sensitive to fluctuations in foreign exchange markets, still marked by the monetary crisis of 1997, when the region’s currencies collapsed under the weight of the rising dollar.
Recent developments in the US bond market have aggravated tensions. Yields on 30-year U.S. Treasuries rose to their highest level in two decades above 5%, sending the dollar higher and accelerating the flow of money out of emerging markets. That has left some Asian central banks in a bind: raise interest rates to defend their currencies and support demand for local bonds, at the expense of economic growth, or try to protect already strained economies in other ways.
Indonesia’s central bank responded to the dilemma on Wednesday by raising interest rates for the first time in more than two years, surprising analysts who had not expected a half-point increase. Bank Indonesia Governor Perry Warjiyo said the move was aimed at stabilizing the rupiah and fighting inflation.
The rupee continued to reach new lows, close to 18,000 to the dollar, despite repeated interventions by the central bank to set a floor for the currency. At a parliamentary hearing this week, Mr Warjiyo said the central bank had a “more than sufficient” stock of foreign exchange reserves despite having “increased the dosage” of monetary interventions.
“It’s not business as usual,” he said. “We are doing everything in our power. »
Asia’s biggest economies are also feeling pressure. Take Japan.
Tokyo intervened at least twice last month to support the yen’s fall against the dollar, spending what analysts estimate was $63 billion to prop up the currency. Atsushi Mimura, the top Japanese government official overseeing monetary policy, signaled that more interventions could follow, with officials appearing to draw a line around 160 yen to the dollar, close to a 38-year low.
But the momentum proved fleeting. Two weeks after a brief recovery, the yen fell again, giving up about half of its gains.
“Intervention is often used to buy time,” Goldman Sachs analysts wrote in a research note, noting that Japan managed to strengthen the yen in 2024 through intervention. This time, “we are skeptical that the same thing will happen in the near future,” they wrote, predicting further depreciation of the yen.
In India, the government has taken steps to ease pressure on the rupee, which has lost more than 6 percent against the dollar this year. Prime Minister Narendra Modi has called on Indians to perform an act of “patriotism” by spending less on gasoline, diesel and imported goods, which would help stem the flow of rupees being exchanged for dollars.
Mr Modi also implored Indians to adopt austerity measures to reduce demand for imported fuel, including canceling non-essential trips abroad, working from home and reducing the use of cooking gas. The Indian government has also more than doubled import duties on gold and silver to discourage people from buying these precious metals abroad.
“In the current situation, we need to give great importance to foreign exchange economy,” Mr. Modi told a political rally this month.
The rupee’s weakness has been compounded by foreign investors withdrawing money from India and moving it to the U.S. dollar or to foreign markets that are rising due to enthusiasm for artificial intelligence companies. As a result, the flow of money into the country is slowing just as rising energy prices drive up import costs.
Somnath Mukherjee, chief investment officer at ASK Wealth Advisors in Mumbai, said the popular trade among foreigners is: “Sell India, buy the US and Taiwan.”
Indonesia and the Philippines face a similar situation, with foreign investors reducing their positions in the region as import bills have become more expensive.
ANZ, the Australian banking group, said it “will become increasingly difficult to maintain” the level of intervention led by India, Indonesia and the Philippines.
The foreign exchange reserves of Indonesia and the Philippines have each fallen by about $8 billion since the start of the Iran war, a decline of 5 percent for Indonesia and 7 percent for the Philippines. India’s foreign exchange reserves fell by almost 4%, or about $27 billion, in early May.
The short-term easing of the region’s currencies is based on a single development, economists believe.
“We need to see the true end of the war in Iran to see these currencies start to rise,” said Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis, a French financial firm.
But the energy shock will likely leave deeper scars, said Mr. Rehman, the financial markets analyst. After the 1997 financial crisis, Asia built larger reserves, adopted flexible exchange rates and strengthened its institutions to better withstand future shocks. The war in the Middle East, he says, has exposed a different kind of vulnerability.
The question now is whether Asia can reduce its energy dependence on the Middle East and the US dollar, Rehman said.
“This crisis did not create this question,” he said. “It just made it impossible to ignore.”
