A confluence of surging oil prices and a strengthening US dollar is battering Asian currencies with a force not seen in nearly three decades. The Indian rupee and Philippine peso have sunk to historic lows. The Indonesian rupiah has slipped past the worst levels of the 1997 Asian financial crisis. Japan and South Korea have collectively spent tens of billions of dollars intervening in foreign exchange markets — with limited effect. What is unfolding across the region is not ordinary market turbulence. It is a structural crisis shaped by deep energy dependence, accelerating capital outflows, and intensifying pressure on household incomes.
The people hardest hit are those who can least afford it. Low-income families dependent on imported fuel and food spend a disproportionately large share of their earnings on basic necessities, meaning every tick downward in the local currency erodes their purchasing power more sharply than it does for wealthier households. In Manila's wet markets, on Delhi's streets, and at Indonesian fishing ports, rising diesel prices have already idled boats and driven daily living costs higher.
The institutional memory of 1997 weighs heavily across the region. That year, Asian currencies buckled under the pressure of a surging dollar, triggering a cascade of devaluations and economic crises that reshaped the region's politics and financial architecture. History is rhyming again — though analysts are quick to note that the trigger this time is geopolitical conflict rather than a purely financial bubble.
The "Oil-Plus-Dollar" Squeeze: Why Asian Central Banks Are Back in Defensive Mode.
Asia is uniquely exposed to energy price shocks. Approximately 80% of the region's oil shipments transit the Strait of Hormuz, meaning any deterioration in Middle East conditions hits Asian economies first and hardest. The current shock arrived on already fragile ground: China's post-pandemic recovery has underperformed expectations, Japan remains mired in structural low growth, South Korean exports are under pressure, and several Southeast Asian economies were already grappling with capital outflow risks before oil prices spiked.
In this environment, currency depreciation has failed to deliver its traditional economic dividend. Instead of stimulating exports, weaker currencies have primarily driven up import costs and fanned inflation. The Indian rupee, down more than 6% this year, is widely described by market analysts as one of Asia's worst-performing currencies. The Indonesian rupiah is approaching the psychologically significant 18,000 rupiah per US dollar threshold — weaker than at the nadir of the 1997 crisis. The Philippine peso has similarly hit record lows. Japan and South Korea have deployed substantial reserves to slow the slide, but each intervention has provided only temporary relief.
Beneath these exchange rate moves lies a more dangerous structural vulnerability: widespread dollar-denominated debt across the region. When local currencies persistently weaken, the cost of servicing those obligations rises sharply for both corporations and governments. Economists have long called this dynamic "currency mismatch" — the gap between local-currency revenues and dollar-denominated liabilities. When that gap widens too far, bank balance sheets and corporate finances can deteriorate with startling speed.
Asian central banks now face a trap with no comfortable exit. Raising interest rates can temporarily stabilize exchange rates, but risks further damaging economies that are already weakening. Holding rates steady risks accelerating capital outflows and deeper depreciation. For more than a decade, many Asian economies rode a wave of cheap money and loose global liquidity. That era is over. US interest rates remain elevated, the dollar's safe-haven status has been reinforced by geopolitical uncertainty, and capital is flowing back toward US assets — forcing Asian central banks into a currency-defense posture they had hoped to leave behind.
Bank Indonesia recently surprised markets with a 50-basis-point rate increase aimed at restoring confidence. Japan and South Korea have issued repeated signals of verbal intervention. But what markets are most worried about is not short-term exchange rate swings — it is whether Asian economies are entering a state of prolonged structural deterioration.
Sustained depreciation risks setting off a self-reinforcing downward spiral: a weaker currency drives imported inflation higher, which suppresses consumer spending, slows economic growth, accelerates capital outflows, and pushes the currency lower still. This logic played out catastrophically during the 1997 crisis. Most Asian economies today hold far larger foreign exchange reserves and operate under more mature financial regulation than they did then. But a critical new complicating factor has emerged: global geopolitical risk is substantially higher than it was in 1997.
Iran as Asia's Biggest External Variable — and Whether China Can Serve as a Relative Anchor
The market's sensitivity to Middle East developments became vividly apparent in recent weeks. When reports surfaced that the United States and Iran might be nearing a nuclear agreement, oil prices retreated and Asian currencies staged a brief rally. When the US subsequently struck targets in southern Iran, risk-aversion sentiment surged and those gains evaporated.
The episode illustrated a structural reality: Asian economies are no longer able to insulate themselves from Middle Eastern events. From energy security to shipping insurance to capital flows, the entire Asian financial system is deeply entangled with the Strait of Hormuz. Iran itself is simultaneously mired in a severe domestic economic crisis — persistent high inflation, a sharply depreciated rial, and dramatic food price increases — that makes its behavior harder to predict and its stability harder to assume.
For Asian policymakers, the primary fear is not Iran's internal economy but the risk that prolonged regional instability produces a structural upward shift in energy prices. Should international oil prices remain elevated for an extended period, manufacturing costs, logistics costs, and household living expenses across Asia would all rise in tandem, compounding the currency pressures already in play.
Among Asian currencies in this turbulent period, the Chinese renminbi has faced pressure but has experienced comparatively limited volatility. This relative stability, however, does not mean China is insulated. As Asian currencies broadly depreciate, Chinese exporters face intensifying competition from regional rivals whose goods have become cheaper in dollar terms. And if neighboring economies deteriorate significantly, demand for Chinese exports across Asian markets will weaken.
More broadly, anxiety about structural dependence on the dollar system is rising across the region. The recent expansion of cross-border renminbi settlement, proposals for Asian monetary cooperation mechanisms, and various national de-dollarization initiatives all reflect a shared underlying concern: that excessive reliance on the US dollar leaves countries dangerously exposed during geopolitical crises.
With the dollar strengthening and US long-term Treasury yields climbing above 5%, Asian central banks face constrained options on multiple fronts. How to balance sustaining economic growth while defending currency stability will test the policy judgment of governments across the region in the months ahead. Analysts suggest the more durable solutions may ultimately lie in accelerating energy source diversification and reducing structural over-dependence on any single currency system — neither of which can be accomplished quickly enough to ease the pressure currently bearing down on Asian markets.
