The Iran war may be fought in the Persian Gulf, but its economic casualties are mounting thousands of miles away in Asian trading rooms. As oil prices breach $120 per barrel and global risk sentiment collapses, currencies from Indonesia to South Korea are experiencing their worst selloff since the pandemic, forcing central banks into emergency interventions that echo the Asian financial crisis of 1997.
The contagion spreads eastward
The Indonesian rupiah has fallen 8% in two weeks, triggering Bank Indonesia to burn through $4 billion in reserves defending the 16,000 level. The Korean won touched its weakest point since 2009, while the Philippine peso and Malaysian ringgit have both breached psychological barriers that hadn't been tested in years. Even traditionally stable Singapore has seen its dollar weaken beyond the central bank's comfort zone.
The transmission mechanism is brutally straightforward: higher oil prices mean wider current account deficits for Asia's energy importers, while the flight to dollar safety creates a vicious cycle of depreciation. Unlike during the Ukraine conflict, when commodity exporters like Indonesia benefited from higher prices, the Iran war's specific disruption of Gulf shipping routes hits Asian economies particularly hard given their dependence on Middle Eastern crude.
Central banks face impossible choices
The policy dilemma confronting Asian central bankers would make their predecessors from 1997 wince. Raising interest rates to defend currencies risks choking off growth just as export demand weakens. But allowing further depreciation threatens to import inflation that's already testing political tolerance across the region.
South Korea has opted for direct intervention, selling dollars in spot markets while arranging swap lines with the Federal Reserve. Indonesia is trying a different approach, imposing soft capital controls on certain portfolio flows while maintaining its policy rate. Thailand, scarred by memories of 1997, has preemptively raised rates despite slowing growth.
Our take
The Iran war is delivering an economics lesson that Asia thought it had learned and moved past: in times of global crisis, emerging market currencies remain acutely vulnerable to forces beyond their control. The irony is that many of these economies have stronger fundamentals than during previous crises – higher reserves, flexible exchange rates, better banking systems. But none of that matters when oil hits $120 and the dollar becomes the only safe haven in a dangerous world. The real test will come if the conflict drags on and Asian governments face the political heat of rising fuel and food prices. That's when we'll learn whether the region's democratic progress since 1997 can withstand the kind of economic pressure that historically has ended badly for both currencies and governments.
