Asia’s reserves face strain as oil shock and dollar surge hit currencies

A Middle East war is now running through Asia’s foreign-exchange markets, with higher oil prices and a surging dollar squeezing currencies that were supposed to be protected by the reserve build-up after 1997. Asia buys about 80% of the oil shipped through the Strait of Hormuz, so any prolonged disruption raises import bills, worsens inflation and forces central banks to decide whether to defend exchange rates or absorb the hit.

The pressure is already showing up in record-low currencies and emergency policy moves. India, Indonesia and the Philippines still have room to raise interest rates and use reserves to steady their currencies, but each option has a cost. Selling dollars can slow a slide, yet it also drains reserves. Raising rates can support exchange rates, but it risks slowing growth and pinching consumers already facing higher fuel and food costs.

India has emerged as the clearest stress point. The rupee has hit record lows under pressure from oil shock concerns, persistent foreign portfolio outflows and a widening current-account strain, making it Asia’s worst-performing currency this year. Several Asian countries, including India and the Philippines, have already intervened in foreign-exchange markets since the Iran war began, a sign that policymakers are treating the shock as more than a routine bout of volatility.

The Philippines has already raised rates, and officials have discussed an out-of-cycle increase if inflation worsens before the next scheduled meeting. That kind of contingency planning underscores how quickly the energy shock is feeding into domestic price pressure. Indonesia also remains in the group that can still lean on its reserves and, if needed, tighten policy further, but the window narrows if oil stays high and the dollar keeps climbing.

The comparison hanging over the region is 1997. Thailand devalued the baht on July 2, 1997, after months of speculative pressure had depleted its official reserves, and the crisis spread across East Asia. The International Monetary Fund eventually assembled a $40 billion stabilization package for South Korea, Thailand and Indonesia. Analysts say the region is better insulated now, with more flexible exchange rates, deeper local markets and much larger reserve buffers than it had then. That does not make Asia immune. It does mean the countries with the biggest reserve cushions and the most room to raise rates are better positioned than those already leaning on both.