7 Asian Currencies Fall as Oil Hits $120 a Barrel

By VirentaNews Staff — May 23, 2026

Escalating geopolitical tensions involving Iran have reignited concerns over financial stability across Asia, as surging oil prices and a strengthening U.S. dollar strain regional currencies and foreign-exchange reserves. The confluence of higher energy import costs and capital outflows is testing the resilience of economies that have long relied on export-led growth and managed exchange rates. While many Asian nations entered this crisis with stronger buffers than in 1997, vulnerabilities persist—particularly in countries with large current account deficits and limited monetary policy flexibility—raising the risk of currency devaluations and tighter financial conditions in the months ahead.

Oil Prices and Dollar Strength Test Reserves

Crude oil prices have surged past $120 per barrel on fears of supply disruptions from the Persian Gulf, a critical chokepoint for global energy flows. For net oil-importing Asian economies—including India, the Philippines, Indonesia, and South Korea—this represents a significant terms-of-trade shock. According to data from the International Energy Agency (IEA), Asia accounts for over 40% of global oil demand, with several nations importing over 70% of their crude needs. The stronger U.S. dollar, measured by the DXY index, has appreciated nearly 8% year-to-date, amplifying the cost of energy and debt servicing in local currencies. As a result, foreign-exchange reserves across emerging Asia have declined by over $45 billion since the start of the year, with Thailand and Malaysia seeing the steepest drawdowns, according to the Bank for International Settlements (BIS). These reserve losses signal growing intervention by central banks to stabilize exchange rates and prevent disorderly depreciation.

Central Banks and Governments Respond

The primary actors in this unfolding economic stress are central banks across Asia, many of which are now caught between defending their currencies and preserving economic growth. The Reserve Bank of India has conducted over $12 billion in dollar sales since February to cap the rupee’s decline, while Indonesia’s Bank Indonesia has raised interest rates by 100 basis points in just three months. Governments are also re-evaluating fiscal support, with the Philippines announcing a temporary fuel subsidy and South Korea releasing strategic petroleum reserves to cushion inflation. Meanwhile, the U.S. Federal Reserve’s continued hawkish stance—keeping rates elevated amid sticky inflation—has indirectly intensified pressure on Asian monetary authorities. Regional coordination remains limited; unlike during the 1997 crisis, there is no unified Asian monetary response, leaving countries to navigate the turbulence largely on their own.

Trade-Offs Between Stability and Growth

The policy trade-offs facing Asian economies are stark: defending currencies risks choking domestic demand through higher borrowing costs, while allowing depreciation can fuel inflation and weaken investor confidence. Countries like Sri Lanka and Pakistan, still recovering from recent balance-of-payments crises, are especially exposed. A weaker currency raises import prices, feeding into already elevated inflation—India’s wholesale price index rose 9.2% year-on-year in March, largely driven by energy. At the same time, allowing too much flexibility in exchange rates could destabilize debt markets; nearly $180 billion in corporate dollar-denominated debt sits on Asian balance sheets, per Institute of International Finance estimates. Intervention in forex markets provides short-term relief but depletes reserves that may be needed in deeper crises. Ultimately, the region faces a dilemma: prioritize external stability at the cost of growth, or accept currency volatility in hopes of sustaining domestic economic momentum.

Why This Crisis Feels Familiar

This moment echoes the 1997 Asian financial crisis, but key differences define the current landscape. Then, fragile banking systems, excessive short-term dollar borrowing, and fixed exchange rate regimes collapsed under speculative pressure. Today, most Asian economies maintain flexible rates, higher reserves, and stronger fiscal positions. Yet, the structural dependence on energy imports and exposure to global financial cycles remain. The trigger—geopolitical conflict in the Middle East—adds urgency, as oil markets react swiftly to any disruption in the Strait of Hormuz, through which 20% of the world’s oil passes. Unlike in 2008 or 2020, this shock is not financial in origin but geopolitical, limiting the effectiveness of traditional monetary and fiscal tools. The timing, coinciding with a global disinflation struggle and tight dollar liquidity, magnifies its impact.

Where We Go From Here

Over the next 6 to 12 months, three scenarios could unfold. In the first, de-escalation in the Middle East allows oil prices to retreat below $90, easing pressure on currencies and enabling central banks to pause rate hikes. In the second, prolonged conflict drives oil above $140, triggering further reserve sales, credit rating downgrades, and potential balance-of-payments support from the IMF for weaker economies. A third scenario involves greater regional coordination—such as swap lines among Asian central banks or a coordinated release of strategic reserves—mimicking the Chiang Mai Initiative’s expanded role. While the first scenario offers stability, the second could force painful adjustments, particularly in nations with low reserve coverage. The third remains possible but politically complex.

Bottom line — while Asia is better equipped today than in 1997, the dual shock of a stronger dollar and higher oil prices risks exposing lingering vulnerabilities, particularly in nations with weak external balances and limited policy space.

Source: The New York Times