Most Asian currencies came under pressure on Friday as investors assessed the economic impact of higher oil prices tied to the U.S.-Israel war on Iran. Concerns about energy supply disruptions and hawkish signals from multiple central banks combined to sap risk appetite across regional markets.
Trading in the region was subdued in part due to a market holiday in Japan, though the Japanese yen retained much of the gains it recorded on Thursday after hawkish remarks from the Bank of Japan. Elsewhere, major global central banks flagged that the inflationary effects of elevated oil prices are likely to keep borrowing costs higher for longer, a factor that weighed on sentiment for a broad swath of currencies.
Dollar movement and weekly performance
The U.S. dollar, which had climbed to multi-month highs earlier in the week, retreated and was set to record its first weekly loss in three. In Asian trade the dollar index and dollar index futures were up around 0.2% each, but both remained roughly 0.8% lower on the week.
While the greenback benefited from reduced market expectations for Federal Reserve interest rate cuts this year, several other developed-market currencies outpaced the dollar's moves. The Fed held interest rates steady on Wednesday and emphasised uncertainty around oil-driven inflation - notably it did not indicate a plan to hike rates. That stance contrasted with more hawkish commentary from the Bank of Japan, the European Central Bank, the Swiss National Bank and the Bank of England.
As a result, the yen, euro, Swiss franc and pound were all positioned for weekly gains versus the dollar. The Australian dollar also strengthened after the Reserve Bank of Australia raised interest rates and warned that further increases could follow if oil prices continued to underpin inflationary pressures.
Asian FX - vulnerability to energy shocks
On the whole, Asian currencies were softer on Friday and showed fractional weekly declines as markets grappled with the prospect of sustained higher energy costs. Economies across Asia are widely viewed as particularly exposed to energy supply shocks stemming from the Iran conflict, since large markets such as India, South Korea and Japan import a substantial share of their energy needs.
The Indian rupee exhibited acute pressure, hitting a series of record lows during the week, with USD/INR trading near the 93-rupee level and the pair up about 0.4% on Friday. South Korea's won also weakened materially - USD/KRW reached its highest level since 2009 earlier in the week and was trading about 0.5% higher.
Market commentary pointed to Iran keeping the Strait of Hormuz largely closed amid attacks involving the U.S. and Israel. The Strait is a critical shipping lane for oil and gas heading to Asia, and its effective closure raised concerns about continued disruptions to supply.
Not all regional currencies moved in the same direction. The Chinese yuan performed relatively better, with USD/CNY essentially flat for the week. The yuan's muted response followed the People’s Bank of China leaving its benchmark loan prime rate unchanged on Friday. Observers noted that China is comparatively better positioned to weather oil and gas supply shocks because of its large petroleum reserves and its relatively modest dependence on gas for power generation.
Market backdrop
Investors weighed two dominant themes: the near-term inflation risk stemming from higher oil prices due to geopolitical conflict, and increasingly hawkish central bank commentary outside the United States. Those themes intersected across FX, with energy-dependent Asian economies and currencies showing particular sensitivity to oil-related supply concerns.