Is Asia facing a new currency crisis? | Counting the Cost

Overview

Asian currencies are under renewed pressure. Commentators caution that this may not yet be a full-blown “currency crisis,” but conditions could worsen if underlying economic weaknesses and global shocks persist.

Key reported drivers of currency weakness

• Strait of Hormuz conflict and Iran-linked tensions: Oil and gas disruptions (linked in the discussion to roughly one-fifth of global flows) lift energy prices, intensify inflation, and increase import bills across many Asian economies—weakening currencies.
• Dollar strength and capital flight: Investors shift toward US dollars and safer assets such as gold and US Treasuries, pushing down Asian currencies (including the rupee, peso, and rupiah).
• Currencies were already weak before the Iran shock: Alicia Garcia Herrero notes these currencies had deteriorated earlier due to expectations of Fed rate cuts by central banks—when cuts didn’t materialize as anticipated, stress intensified.
• US “sucking in” global savings: Strong US investment opportunities attract capital away from Asia, reducing demand for Asian assets and currencies.
• Foreign exchange reserves and financing risk: Bhima Yudhistira emphasizes that the key issue is not only reserve levels, but also short-term and external debt maturities and the ability to meet obligations during market stress.

Real-world impacts discussed

• Higher cost of living: Households face increased food and fuel bills as weaker currencies raise the cost of imported inputs.
• Business strain and import difficulty: Firms that depend on foreign currency for imports or inputs experience shortages and tighter margins.
• Examples from the ground:
  • Jakarta: Vendors report rising soybean and packaging costs, leading to smaller portions and limited ability to raise prices as demand falls.
  • India (sector constraints): The discussion highlights constraints in sectors dependent on foreign currency, including jewelry.

What governments are doing—and why it may be insufficient

Central bank intervention (spending reserves)

Japan and South Korea (and others) reportedly have intervened by buying/defending their currencies. However, this can drain US-dollar reserves, increasing the risk of prolonged “fighting the market.”

India: attempts to reduce dollar outflows

• Modi’s “voluntary austerity” appeal: Encourage less fuel use, reduced gold buying, and fewer overseas trips; also include higher duties on gold and silver.
• Panel skepticism:
  • Biswajit Dhar argues gold serves not only social purposes but also as a safe-haven investment, making reduced consumption unrealistic. He also criticizes “Make in India/self-reliance” for not yet lowering import dependence in electronics and components.
  • Alicia Garcia Herrero says India is already “beyond the sweet spot.” With a current account deficit and low industrial capacity, a weak currency doesn’t automatically correct trade imbalances and may mainly increase financing stress.
  • She suggests the most credible stabilizing signal would be interest rate hikes to demonstrate intent to support the currency, even if doing so harms growth.

Indonesia: state control over exports and FX capture

Indonesia is portrayed as pursuing a more interventionist approach, including:

• Increasing state control over exports (a resource-nationalism model)
• Creating a state-run entity as the sole buyer of certain commodities (coal, palm oil, and some nickel products)
• Routing export earnings into state banks to support the rupiah

Bhima Yudhistira argues this may reduce pressure in the short term, but likely:

• undermines market confidence,
• increases policy uncertainty, and
• shifts the core problem toward fiscal and export-control design, not only monetary policy.

Alicia broadly agrees that central banks cannot solve everything, and suggests Indonesia should prioritize more foreign direct investment (FDI) rather than further tightening export controls.

Is this like 1991 or like the Asian financial crisis?

The episode compares today’s environment with earlier shocks (including 1991 Gulf War-type oil spikes). While import-cover may be longer now than then (with India reportedly having more reserves than in 1991), the main risk remains short-term external obligations and the danger of destabilizing bond and equity markets.

Discussed policy alternatives

• Trade settlement in local currencies (or RMB): Alicia notes movement toward RMB settlement is already occurring, but warns it can be difficult to execute during stress without trade-offs. Practical access depends on how convertible/usable the currency is, and it can increase reliance on China.
• The panel emphasizes that currency stabilization typically requires a combination of:
  • credible macro policy signals (possibly including rate action), and
  • reforms that reduce vulnerability—especially fiscal/energy-related pressures.

Presenters / contributors

• Scott McLean (host)
• Fitri Muna Ham (field reporter for the segment)
• Alicia Garcia Herrero (Chief Economist for Asia-Pacific and the Middle East, Natixis)
• Biswajit Dhar (Indian economist; retired professor, Jawaharlal Nehru University)
• Bhima Yudhistira (Executive Director, Centre of Economic and Law Studies)