US strike on Iran triggers oil shock in Asia

A targeted US military strike on Iranian military assets has reignited geopolitical risk in global markets, and the immediate fallout is being felt most acutely across emerging Asia.

Asian currencies, equities and bonds are under renewed pressure as investors price in higher energy costs, a potential capital exodus and a delayed path to monetary easing. 

The Bloomberg Asia Dollar Index dropped 0.3%, its largest single-day decline in weeks. The South Korean won and Indonesian rupiah led regional currency losses, while equity markets from Manila to Seoul posted declines.

The driver is oil. Brent crude has surged toward US$80 per barrel on concerns that the confrontation may escalate and disrupt crude flows through the Strait of Hormuz. 

Nearly a third of all global maritime oil passes through that narrow chokepoint. Any material disruption to this corridor will have a disproportionate effect on Asia, which imports the overwhelming majority of its energy.

India, for example, imports more than 85% of its crude oil. Indonesia and the Philippines are similarly exposed. South Korea, Japan and Thailand—all manufacturing powerhouses—are highly sensitive to fuel costs. 

Any sustained increase in crude prices will directly impact consumer inflation, industrial production costs and current account balances.

Bond markets have begun to reflect this risk shift. Yields on Indian, Indonesian, and Thai local currency bonds are rising as investors adjust for the dual risk of rising inflation and capital outflows.

Foreign holdings in Asian debt had been increasing over the last two months, supported by disinflation and expectations of rate cuts. This trend could now be at risk.

The Indian rupee, in particular, is facing renewed headwinds. Widening trade and fiscal deficits leave the currency vulnerable to sustained oil shocks.

The Reserve Bank of India may find its room to cut rates narrowing, especially if the inflation pass-through accelerates. Similar dynamics are at play in the Philippines, where food and fuel make up a large portion of the inflation basket.

South Korea’s won is under pressure not only from energy prices but also from broader sensitivity to global supply chains and shifts in investor sentiment. The Bank of Korea has kept monetary policy tight to manage household debt and inflation expectations, but a prolonged energy spike may force it to choose between growth and price stability.

Thailand and Indonesia, while more domestically driven, are still at risk. Thailand’s tourism recovery could slow if global travel costs rise. Indonesia’s central bank has only recently managed to stabilize the rupiah through rate hikes, and another round of external pressure could complicate that progress.

Meanwhile, China—the world’s largest oil importer—faces a different but equally significant challenge. While it holds substantial strategic reserves and maintains long-term import contracts, a spike in crude still threatens margins for exporters and industrial firms. 

Higher shipping and insurance costs through the Gulf would only add to the pressure. With domestic demand already uneven, any input cost inflation from energy may undermine China’s fragile recovery momentum.

The broader message is this: Asia’s exposure to oil imports and trade routes leaves it vulnerable in moments of geopolitical volatility. 

If Brent moves above $85 and stays there, inflation expectations across the region will rise again. That would likely derail any near-term plans for rate cuts in India, Indonesia, the Philippines, or South Korea. Central banks could be forced to hold or even hike again—at the cost of growth.

Market flows are adjusting accordingly. The dollar is strengthening. Gold prices are climbing. Demand for safe-haven assets is rising, while risk appetite in Asia is diminishing.

These aren’t knee-jerk reactions. They reflect deeper concern about how the current conflict might evolve and how exposed Asia remains to external energy shocks.

The coming days will be crucial. If Iran retaliates or the conflict escalates, markets will reprice even further. The possibility of another round of global energy inflation is now being reflected in commodity markets and FX volatility.

Investors in Asia must now re-evaluate their positioning. Countries with better energy self-sufficiency, lower debt and stronger current account balances will fare better. Others will face rising fiscal and monetary constraints as the cost of energy, debt service, and currency defense rises simultaneously.

The uneasy calm that had returned to emerging Asia has been disrupted. This is not yet a regional crisis—but it is a clear warning that the balance between growth and inflation remains precarious. 

Energy prices are once again the most important variable for policymakers and geopolitical risk is back as a central driver of capital markets.

Asian economies must brace for further volatility. For investors, selectivity will be critical. The ability to differentiate between vulnerable and resilient markets will define outcomes in the months ahead.