Strait of Hormuz Blocked: Multiple Asian Countries Face Dual Crises of Energy and Exchange Rates

Why the Rise of the Dollar is Hitting the Asian Economy with a Double Blow?

Source: Global Market Report

Asia is already vulnerable to the ongoing disruptions in energy supplies from the Gulf, and now it has to deal with the side effect: their currencies are being crushed by the soaring dollar.

The conflict in the Middle East has effectively cut off oil and gas transported through the Strait of Hormuz. This narrow passage has become the most dangerous choke point in the world.

This conflict has also exposed another painful bottleneck. About 90% of global commodity trade—including the skyrocketing prices of oil and gas—is settled in dollars.

As often happens during periods of global turmoil, investors are pulling funds out of riskier areas and shifting towards U.S. assets. This is driving up the dollar’s exchange rate, with the dollar’s value against Asian currencies nearing the highest point in the past two decades. The result is that many currencies continue to weaken just when their purchasing power is most needed.

In Asia, local energy costs in some regions are even higher than the global benchmark price, and stock market investors are fleeing.

On Monday, just hours before President Trump announced a five-day delay in his plan to bomb Iran’s energy infrastructure, India’s main stock index lost 2.5% in market value. Since the outbreak of war, the index has dropped nearly 13%. The decline in the stock market has led to capital outflows from India, putting downward pressure on the rupee. The won to dollar exchange rate has fallen to a historic low, marking the first time since the 2008 global financial crisis.

In recent days, as signs of Trump seeking to end the war have emerged, financial pressures in the two countries have eased somewhat. But deeper risks have already taken root.

In the Philippines, the economic research institution IBON Foundation reported last Friday that rising oil prices and the depreciation of the Philippine peso constitute a “double blow that will worsen inflation in the coming months, severely impacting millions of impoverished Filipino families.” Philippine President Ferdinand R. Marcos Jr. declared a state of energy emergency on Tuesday. The Philippines imports 90% of its oil from the Middle East.

In South Korea, President Lee Jae-myung launched a nationwide energy-saving campaign on Tuesday. Nearly 70% of the country’s crude oil supply must pass through the Strait of Hormuz.

The entire world is struggling to cope with a new oil shortage, which analysts believe is more severe than the oil crisis of the 1970s.

Even in the United States, which became a net energy exporter during the shale oil boom, the average price of regular gasoline has risen to $3.98 per gallon, more than $1 higher than pre-war levels.

Compared to the situation in Asia, first, the supply shortage is more acute. The price of Brent crude oil traded across the Atlantic is currently about $100 per barrel, up from $70 a month ago. However, due to the high demand from Asian countries purchasing oil from the Middle East, the sudden reduction in supply has pushed prices even higher.

When these prices are converted into local currencies that are continuously depreciating against the dollar, the second blow appears. Over the past year, even as the dollar itself has depreciated against most currencies, the Indian rupee has been losing value. Now, one dollar exchanges for 93.2 rupees, which is 8% higher than a year ago.

As a result, Indian buyers now have to spend 14,748 rupees to purchase the same amount of energy that cost only 6,087 rupees a year before the war.

Harvard economist Kenneth Rogoff stated, “With the local currency already weak, rising oil prices are just adding insult to injury.”

Across Asia, spending such huge amounts of money on a basic commodity is a harsh reality.

For example, truck drivers in Thailand report a lack of diesel for transporting goods between ports. Like gasoline, diesel is refined from crude oil, and its price has also risen significantly.

Any country that sees an increase in spending on imported goods while experiencing a decrease in export revenue will see its currency lose value against the rest of the world. And when anxious investors shift their capital—often towards the traditionally safest store of value, the dollar—it further depreciates the struggling currencies.

The Thai baht had a stronger performance than the Indian rupee at the beginning of this year. However, it has quickly fallen to a 10-month low and is expected to continue declining as long as the war persists.

Thailand’s tourism and export sectors usually benefit from a weak baht. However, this time, concerns about global travel have led to vacation cancellations.

Jahanzeb Aziz, an economist at JPMorgan in New York, stated, “The issue for any country is, how do you want to absorb this shock?” Governments and central banks must make decisions that ultimately determine who will be hit the hardest.

Aziz noted that the current crises affecting countries are fundamentally different from the Asian financial crisis, partly due to lessons learned from that crisis. Nowadays, countries allow their exchange rates to float, meaning that the value of currencies fluctuates with supply and demand. Countries have also accumulated significant reserves of dollars and other foreign assets that they can draw upon in times like this.

Governments have also started cutting spending, making hundreds of adjustments to reallocate funds. For example, some countries have ordered government employees to work from home and have implemented fuel rationing.

A report released on Monday by Malayan Banking’s Philippines branch stated that closely monitoring “how authorities respond to rising fuel costs is crucial, as it could impact inflation expectations and currency stability.”