Emerging Markets Fall as US Military Action Against Iran Sparks Oil Fears

Asian currencies and stock markets saw declines at the week’s start as US military actions against Iran worried investors and pushed oil prices up.

Among the currencies, South Korea’s won experienced the most significant drop, contributing to a 0.3% decline in the Bloomberg Asia Dollar Index. The Indonesian rupiah also weakened, with the central bank confirming its intervention both onshore and offshore to stabilize the market. On the equity side, MSCI’s Emerging Markets equities index decreased by 1%.

President Donald Trump’s decision to target three Iranian nuclear facilities has marked a new chapter in the Israel-Iran conflict, raising concerns about potential disruptions to energy supplies from the Middle East. This poses a significant risk for many Asian economies that heavily depend on fuel imports.

“Our analysis shows that the Philippine peso, Korean won, and Thai baht are especially vulnerable to surges in oil prices,” noted analysts from Mitsubishi UFJ Financial Group, Inc., led by Michael Wan. “An escalation in oil prices could affect the monetary policies of the Philippines and Vietnam, and to a lesser degree, India, potentially postponing interest rate cuts by central banks.”

The recent developments also pose risks to the rally observed in local currency bond markets, which had previously benefited from significant inflows as global funds sought to avoid US assets amid a weaker dollar. The Strait of Hormuz, a vital route for Middle Eastern oil, is under close observation for any potential blockages, especially as Tehran hints at possible retaliation.

Reflecting the growing concern, the 30-day correlation between Brent oil futures and the Asia Dollar Spot Index has dropped to its most negative level since March 2022, currently reported at -0.45, according to Bloomberg’s calculations.

Wells Fargo & Co emphasizes that the Indian rupee, along with the won, baht, and peso, may experience the most pronounced impacts. The long positioning for the won could be the most extended, followed by the baht, leading to relatively poor short-term performance, according to Chidu Narayanan, head of macro strategy for APAC at the firm.

In equity markets, Taiwan’s market witnessed some of the largest declines, especially in chip stocks due to concerns that the US might withdraw waivers that allow companies to export American technology to China.

As Robin Brooks, a senior fellow in the global economy and development program at the Brookings Institution pointed out, investors were “rapidly moving towards emerging markets” following Trump’s announcement about US strikes. “This raises the risk of a sudden reversal of these investment flows, potentially resulting in a sharp decline in EM currencies.”

© 2025 Bloomberg

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