SEOUL, South Korea — The Indian rupee and Philippine peso have fallen to historic lows. Japan and South Korea have spent billions to prop up their currencies in a bid to avoid the same fate. The Indonesian rupiah is now weaker than it was at the height of the Asian financial crisis.
For Asian countries that rely heavily on imported energy, the war in the Middle East has already sent oil prices soaring. Now they face a ripple effect that has grown into a crisis of its own: currencies in freefall, pressured by rising fuel costs and nervous investors rushing to the safety of the U.S. dollar.
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To contain devaluation, central banks across Asia have repeatedly intervened in foreign exchange markets, using international reserves accumulated over the years precisely for moments like this.
These interventions, which involve selling dollars and buying local currencies, prevented a complete collapse. But concerns are growing about the long-term costs of getting through the crisis — including how long central banks will be able to continue using up reserves if import prices continue to rise.
“At what rate of reserve reduction does the ‘we have large reserves’ argument start to lose its power to reassure?” asked Sana Ur Rehman, financial markets analyst at EBC Financial Group.
Ordinary people across Asia are beginning to feel the effects of weakening currencies, especially in countries hit hardest by the energy shock, including India, Indonesia and the Philippines.
When currencies lose value, imports — from fuel to food — become more expensive. These increases tend to hit the poorest families hardest, who spend a greater portion of their income on essential items.
The reduction in the flow of vessels through the Strait of Hormuz, a crucial maritime route for transporting oil and gas leaving the Persian Gulf, has caused oil prices to rise by almost 50% since the start of the war.
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Asia remains highly sensitive to fluctuations in foreign exchange markets, still marked by the 1997 currency crisis, when currencies across the region collapsed under the weight of the appreciation of the dollar.
Recent moves in the US bond market have added to the pressure. Yields on 30-year US Treasury bonds rose to a two-decade high above 5%, strengthening the dollar and accelerating the outflow of funds from emerging markets.
This has left some Asian central banks faced with a dilemma: raise interest rates to defend the currency and sustain demand for local bonds, sacrificing economic growth, or try to protect economies that are already under pressure from other sides.
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Indonesia’s central bank responded to this dilemma with its first interest rate hike in more than two years, surprising analysts who did not expect the half percentage point hike. Bank Indonesia President Perry Warjiyo said the move sought to stabilize the rupiah and combat inflation.
The rupee continued to renew lows, approaching 18 thousand per dollar, despite repeated interventions by the central bank to create a floor for the currency. In a parliamentary hearing, Warjiyo stated that the central bank maintained a “more than adequate” volume of international reserves, despite having “increased the intensity” of foreign exchange interventions.
“This is not a normal situation,” he said. “We are using all available resources.”
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Asia’s biggest economies are also feeling the pinch. Take the case of Japan.
Tokyo intervened at least twice last month to strengthen the yen against the dollar, spending what analysts estimate at $63 billion to prop up the currency. Atsushi Mimura, the Japanese government’s top official responsible for exchange rate policy, indicated that further interventions could occur, with authorities apparently setting a limit at around 160 yen per dollar, close to 38-year lows.
But the impulse was short-lived. Two weeks after a brief recovery, the yen retreated again, giving back about half of its gains.
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“Intervention often serves to buy time,” Goldman Sachs analysts wrote in a research report, noting that Japan managed to strengthen the yen in 2024 with intervention. This time, however, “we are skeptical that this will happen again anytime soon,” they wrote, predicting further devaluation for the Japanese currency.
In India, the government has taken measures to ease pressure on the rupee, which has lost more than 6% against the dollar this year. Prime Minister Narendra Modi asked Indians to practice an act of “patriotism” by spending less on gasoline, diesel and imported goods, which would reduce the conversion of rupees into dollars.
Modi also called for austerity measures to reduce demand for imported fuel, including canceling non-essential international travel, working from home and reducing the use of cooking gas. The Indian government also more than doubled import duties on gold and silver to discourage purchases of these metals abroad.
“In the current situation, we need to give high priority to saving international reserves,” Modi said at a political rally this month.
The rupee’s weakness has been worsened by foreign investors withdrawing funds from India and migrating that money to the US dollar or to foreign markets that are booming due to enthusiasm for artificial intelligence companies. As a result, the flow of resources into the country is slowing just as higher energy prices drive up the cost of imports.
Somnath Mukherjee, chief investment officer at ASK Wealth Advisors in Mumbai, said the most popular trade among foreign investors today is: “Sell India, buy US and Taiwan.”
Indonesia and the Philippines face similar pressure, with foreign investors unwinding positions in the region at the same time as import bills become more expensive.
Australian banking group ANZ stated that “it will become increasingly difficult to sustain” the level of intervention carried out by India, Indonesia and the Philippines.
The international reserves of Indonesia and the Philippines have fallen by about $8 billion each since the start of the war in Iran — down 5% for Indonesia and 7% for the Philippines. India’s reserves fell by almost 4%, or about $27 billion, by the beginning of May.
Short-term relief for the region’s currencies depends on a single development, economists said.
“We need to see a real end to the war in Iran for these currencies to start recovering,” said Alicia Garcia Herrero, chief economist for Asia-Pacific at Natixis, a French financial firm.
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