The protracted Middle East conflict is beginning to bite around the world and test the durability of financial markets, from a collapse in Asian currencies to the closure of a low-cost US airline. Since the US and Israel bombed Iran in February, Asian currencies have seen some of the biggest declines in FX markets. Asia is the most vulnerable region to disruption because over 80% of seaborne oil trade passing through the Strait of Hormuz is typically headed there.
The Indonesian rupiah plunged to a record low on Tuesday, and the currencies of other Asian countries that import fuel, such as the Philippines and India, also fell to historic lows. For weeks, central banks have either directly or through state-bank action intervened in currency markets, and they are searching for further ways to do so. There has also been pressure on Malaysian, Thai, and South Korean currencies.
“Central banks will be reluctant to sell down reserves,” stated Mitul Kotecha, Barclays’ head of Asian FX and rates strategy. “As such, we’re probably going to see more creative measures to support their respective currencies. Already depressed by Japan’s low interest rates and concerns over Prime Minister Sanae Takaichi’s borrowing-led economic plans, the war has further pressured the currency.
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