Market Updates - U.S. Iran War

Macro (Rates and FX) - March

The US-Iran war has already begun to ripple through Asian foreign exchange (FX) markets, where currencies trade against one another, and rates markets, which determine government bond yields and interest-rate expectations. The shock is being transmitted mainly through higher oil prices, a stronger US dollar, and a broader global risk-off move. Since the conflict has escalated, oil prices have surged as tensions around the Strait of Hormuz have intensified. The waterway carries roughly one-fifth of global oil and petroleum consumption, making it one of the world’s most critical energy chokepoints. That matters disproportionately for Asia, which sources around 60% of its oil from the Middle East.

In FX markets, the immediate reaction has been typical for geopolitical shocks. The US dollar has strengthened as investors seek “haven demand,” which means they move capital into assets perceived as safer and more liquid during periods of uncertainty. As a result, much of Asia’s currency complex has come under pressure. China’s yuan has weakened as the dollar strengthened and rising corporate dollar demand outweighed official efforts to stabilise the currency. India’s rupee has required support from the Reserve Bank of India (RBI) as rising oil costs and portfolio outflow risks increased pressure on the currency, while South Korea’s won has been hit by both energy vulnerability and heightened global risk aversion. Even relatively defensive currencies such as the Singapore dollar have struggled to fully escape the regional move, while Hong Kong’s dollar has remained mechanically stable due to its currency peg to the US dollar. Overall, the FX response highlights how external shocks quickly expose Asia’s dependence on imported energy and global capital flows.

Rates markets have also been repriced as investors reassess monetary policy paths across the region. In Japan, the conflict initially pushed the two-year Japanese government bond (JGB) yield lower as traders reduced expectations of an immediate rate increase from the Bank of Japan (BOJ). However, the shift has not completely altered the policy outlook, with markets still debating whether tightening could resume later in the year. Across Asia more broadly, policymakers now face a familiar dilemma: weaker growth and tighter financial conditions argue for looser policy, but higher oil prices raise inflation risks and can delay rate cuts. This tension is particularly relevant for India and South Korea, where imported energy costs could keep central banks cautious even as growth sentiment softens. In Hong Kong, US yield moves feed directly into local rates via the currency board, while in Singapore, the Monetary Authority of Singapore (MAS) may tolerate some currency weakness only up to the point where imported inflation becomes uncomfortable. As a result, Asian central banks now face a more difficult policy trade-off, where managing inflation risks from higher energy prices may limit their ability to support slowing growth.

Looking ahead, the key question is how persistent the oil shock becomes. If prices remain elevated, Asia could face a stagflationary mix of weaker growth and higher inflation. The critical question for markets now is whether this conflict proves to be a temporary energy shock, or the start of a more prolonged shift in global risk and inflation dynamics.

Macro (Growth and Inflation) - March

A widening Middle Eastern conflict has posed a fresh test for global central banks, as fears of oil prices skyrocketing have renewed inflationary and wider growth concerns. Under the assumption of a six-week closure of the Straits of Hormuz, oil prices have risen from $70 to approximately $100 a barrel, with regional inflation in Asia rising by around 0.7 percentage points, according to Goldman Sachs. This draws a strong resemblance to the 1973 Arab oil embargo, where oil prices quadrupled from $2.70 a barrel (around $18 today) before the embargo to $11.65 a barrel (around $77 today). 

For inflation, Japan faces an acute vulnerability to the supply-side disruptions stemming from the US-Iran conflict. Its near-total dependence on Middle Eastern oil – approximately 95% of its supply – has left the Japanese economy susceptible to cost-push inflation. In response, the Japanese government has considered releasing its natural oil reserves to prepare for prolonged supply disruptions, although such an intervention is likely to only address the immediate shock rather than the underlying supply concerns, and therefore the longer-term effects on inflation are conditional on the conflict’s duration. Beyond Japan, other Asian countries such as the Philippines and Vietnam are similarly susceptible to upwards inflationary pressure, sourcing approximately 95% and 88% of their oil imports from the Middle East respectively. The distinction between short and long-term effects is therefore critical; while releasing national oil reserves can minimise inflationary effects, the persistence of cost-push inflation in the region is ultimately determined by external factors, such as the duration of war and extent of disruption to the Strait of Hormuz, that lie beyond the reach of Asian governments.

The surge in energy prices would also act as a significant drag on economic growth for many countries. A report by Nomura Holdings has found that India, South Korea, the Philippines, and particularly Thailand, as among the most exposed Asian economies to higher oil prices due to their high import dependence. Thailand, in the same report, stands out as being the most vulnerable from an oil-price shock, citing the country’s net oil imports being approximately 4.7% of GDP. It estimates that each 10% rise could worsen the country’s current account balance by around 0.5 percentage points of GDP. China, being the world’s largest importer of crude oil, is also facing significant economic consequences, as evidenced by it releasing its lowest economic growth target since 1991. Its reliance on politically fragile suppliers for discounted crude oil, such as Iran and Venezuela, has directly increased production costs for the country’s vast manufacturing sector, eroding profit margins in energy-intensive industries such as steel, chemicals, and electronics, and threatening the price-competitiveness on which China’s export-led growth depends on. Hong Kong and Singapore, on the other hand, remained optimistic about their GDP growth, with both economies’ exposure to the Middle East conflict remaining modest. Economic growth forecasts for the two places remained at around 2.5-3.5% for Hong Kong, and 3.6% for Singapore. The difference in growth outlooks between Asian regions reflects the difference in economic structure; economies most exposed to the conflict are those whose growth remain dependent on manufacturing and cheap energy imports, while those dependent on financial and other service sectors - such as Hong Kong and Singapore - remain less exposed to the conflict.

Overall, the extent of these ripple effects on inflation and wider economic growth will depend on the duration of conflict and whether shipping through the Straits of Hormuz remains stable. However, with persisting uncertainty, cost pressures from a disrupted oil supply may affect regional and global economic performance.

Micro (Industry Impact) - March

Oil prices have surged following disruption to Strait of Hormuz shipping lanes, with Brent crude surpassing $100 per barrel as of March 9, 2026.

Airlines are among the most immediately exposed. Jet fuel accounts for roughly 20 to 30% of total operating costs for full-service Asian carriers, according to IATA, making the sector one of the most directly exposed to an oil price shock. 

Source: IATA

However, the key differentiator across Asian carriers is hedging strategy. Singapore Airlines operates a declining wedge programme, whereby it hedges a higher proportion of near-term fuel consumption, with coverage of up to 50% of expected consumption per quarter. Cathay Pacific was hedging fuel into the second quarter of 2027, covering around 30% of costs until the second quarter of 2026. These measures prove a partial near-term cushion against price spikes. By contrast, AirAsia abandoned fuel derivatives after the pandemic and remains largely unhedged. This vulnerability was already exposed during the Russia-Ukraine oil shock, when it became one of the first Asian carriers to reintroduce fuel surcharges across all flights. Beyond the direct fuel cost impact, jet fuel is priced in US dollars, and as the dollar strengthens on safe-haven demand, Asian carriers face higher local currency costs to purchase the same barrel. As SIA's own CFO noted during a previous oil spike, "there's no escaping higher fuel prices, a stronger US dollar, dragging the expenditure line." Together, the cost squeeze and weakening consumer sentiment from broader inflation create a dual headwind for the sector.

Similarly, Asia's industrial sector faces a cost shock from the conflict, with steel and petrochemicals particularly exposed. South Korea's POSCO, Asia's largest steelmaker, posted full year 2025 operating profit of KRW 1.83 trillion, a 16% decline year-on-year (YoY), with its Q4 2025 earnings release explicitly flagging the weakening Korean won as an escalating cost pressure. Similar to the airlines industry, POSCO faces a two-pronged cost increase; a direct rise in energy and raw material costs, compounded by a weaker won making dollar-denominated inputs more expensive, threatening further unpredictability in future profits.

In petrochemicals, LG Chem faces a similar vulnerability. Its chemicals business depends heavily on naphtha, refined directly from crude oil, as the key ingredient for producing plastics and synthetic materials. The division only just returned to profit in Q3 2025, and did so only because oil prices were low and feedstock was cheap. A sustained oil spike removes that tailwind entirely, possibly pushing the division back into losses. Beyond immediate input costs, prolonged margin pressure forces industrial firms to delay spending on new machinery and equipment. Nomura's analysis of Asian capital expenditure cycles shows that export driven economies like South Korea experience the steepest declines in capital investment when manufacturing profitability deteriorates. An oil shock therefore does not just hurt today's margins, it also risks suppressing the region's next industrial investment cycle.

Micro (Confidence and Supply Chain Adjustments) - March

Beyond the direct impact on oil prices, U.S.-Iran conflict can influence the real economy through changes in business and consumer confidence. When geopolitical uncertainty rises, firms often delay hiring decisions because future costs and demand become more difficult to predict. Energy-intensive industries are particularly exposed. In export-oriented Asian economies such as Japan and South Korea, weaker corporate confidence may similarly translate into lower investment in machinery and equipment, slowing industrial production and economic growth.

Consumer confidence may also deteriorate as rising oil prices feed into inflation. Higher fuel costs increase transportation and logistics expenses, which are often passed through to the prices of goods and services. As living costs rise, households tend to reduce discretionary spending, particularly on travel, retail consumption, and durable goods such as automobiles and electronics. The impact may vary across countries depending on fuel subsidy policies; economies with limited fuel subsidies may experience a sharper rise in transportation costs and a stronger squeeze on household consumption. At the same time, geopolitical uncertainty can reduce financial market risk appetite. Investors often shift away from equities toward safer assets during periods of heightened geopolitical risk, contributing to higher market volatility.

Another key microeconomic channel is supply chain rerouting. The Middle East is a critical hub for global energy transportation, with roughly one-fifth of global oil trade passing through the Strait of Hormuz. If conflict disrupts shipping routes or raises insurance costs for tankers, firms may need to adjust logistics networks or seek alternative suppliers. In recent years, many multinational firms have already adopted “China+1” strategies by expanding manufacturing capacity in Southeast Asia or India to reduce geopolitical risk. While such adjustments may increase short-term costs, they can enhance supply chain resilience over the long run.

Conclusion

Overall, the impact of geopolitical conflict for Asian economies may extend beyond oil price fluctuations themselves. Countries that rely heavily on imported energy or maintain limited fuel subsidies, such as Japan and South Korea, may be more exposed to rising energy costs and weaker consumer demand. Prolonged uncertainty can therefore influence corporate investment decisions, consumer spending behaviour, and the structure of global supply chains.