Asian Currencies Hold Steady as the Middle East and Oil Take Center Stage

Tuesday: Dollar Reaches a One-Week High

Tuesday’s 21.07.2026 Asian currency trading was marked by caution. Most regional currencies remained confined to narrow trading ranges, unwilling to make a decisive move in either direction. Investors faced a difficult choice: on the one hand, the escalating conflict in the Middle East was pushing the dollar higher as a safe-haven currency; on the other, hopes for a diplomatic resolution prevented it from strengthening too sharply.

The U.S. Dollar Index rose to 100.99, its highest level since July 15. This appreciation was not driven by strong U.S. economic data or hawkish signals from the Federal Reserve. It was purely a geopolitical risk premium. In a world where military action is expanding with each passing day, the dollar remains one of the most reliable assets.

However, the dollar’s strength is putting pressure on Asian currencies. Energy-importing countries are particularly vulnerable: the rise in oil prices observed over the past several days is worsening their trade balances and creating additional inflationary pressure. For countries forced to purchase expensive oil on global markets, this represents a serious challenge. Their central banks now face a dilemma: raise interest rates to combat inflation and the risk of currency depreciation, or maintain accommodative policies to support economic growth.

Middle East Conflict: Ninth Consecutive Night of Strikes

The escalating conflict between the United States and Iran remains at the center of attention. U.S. Central Command confirmed the completion of a ninth consecutive night of airstrikes against Iranian targets. The strikes targeted command centers, missile and drone launch sites, and maritime infrastructure.

However, the most alarming development occurred on another front. The Iran-backed Houthi movement in Yemen announced a naval blockade of Saudi Arabia. This means that energy supplies passing through the Red Sea and the Bab el-Mandeb Strait could be disrupted. For Asian countries that depend on oil imports from this region, this could represent another serious blow. The conflict is no longer local and is beginning to involve an increasing number of countries and territories.

The escalation is keeping crude oil prices close to six-week highs. Rising energy costs worsen trade balances, fuel imported inflation, and reduce foreign capital inflows. All of these factors are putting pressure on regional currencies.

Japanese Yen: Near Multi-Year Lows

The Japanese yen continues to be one of the weakest currencies in the world. The USDJPY ... pair was virtually unchanged, but that offers little reason for optimism. The yen remains close to multi-year lows at 162.51 yen per dollar, with no visible signs of a reversal.

The main reason is the enormous interest-rate gap between the United States and Japan. The yield on 10-year U.S. Treasury bonds remains around 4.59%, while the yield on 30-year bonds is still above 5%. This makes dollar-denominated assets extremely attractive to investors, particularly amid geopolitical uncertainty. Japanese investors seeking higher returns continue to invest in U.S. securities, and this flow of capital is weighing on the yen.

Rising oil prices add another layer of risk. Japan imports nearly all of its energy resources, meaning that high oil prices worsen the country’s trade balance and create additional inflationary pressure. If inflation accelerates, the Bank of Japan may come under pressure to raise interest rates. For now, however, the regulator continues to maintain an ultra-accommodative monetary policy.

Investors do not expect the Bank of Japan to change its policy anytime soon, which continues to put pressure on the yen.

Chinese Yuan: Interest Rates Left Unchanged

The Chinese yuan was also virtually unchanged. The USDCNY ... and USDCNH ... pairs showed only minor fluctuations as investors continued to assess China’s decision to leave its benchmark lending rates unchanged.

The decision, announced last week, was in line with market expectations. Beijing continues to rely on targeted fiscal support rather than broad monetary easing. For the yuan, this means that a sharp depreciation is unlikely, but significant appreciation should not be expected either.

China’s economy remains in a difficult position. Weak second-quarter GDP data showed that the recovery is progressing more slowly than expected, but the authorities do not appear ready to introduce radical measures. They prefer targeted stimulus for specific sectors of the economy rather than broad monetary easing. This approach may prove correct over the long term, but in the short term, it provides little support for the yuan.

South Korean Won: Reforms Begin to Deliver Results

Against the backdrop of general weakness among Asian currencies, the South Korean won appears relatively resilient. The USDKRW ... pair edged higher to 1,476.55, while the won remains one of the region’s best-performing currencies.

The reason is the package of foreign-exchange market reforms announced over the weekend. South Korea continues to liberalize its currency system, and investors have responded positively to these measures. Citi noted that headwinds from capital outflows are beginning to ease, while stronger economic fundamentals and a more market-friendly policy mix are creating new tailwinds for the currency.

The won is strengthening not only because of the reforms but also because of the resilience of the South Korean economy. Exports of semiconductors and other high-technology products remain strong despite global uncertainty. This provides the Korean currency with fundamental support that many other Asian currencies lack.

New Zealand: An Inflation Surprise

The most interesting currency story on Tuesday involved the New Zealand dollar. The USDNZD ... pair fell by 0.5% to NZ$0.5864 after inflation data delivered an unexpected surprise.

New Zealand’s annual inflation rate accelerated to 4.1% in the second quarter, its fastest pace in two and a half years. The figure exceeded both market expectations and the Reserve Bank of New Zealand’s forecast. Consumer prices rose by 1.5% compared with the previous quarter, representing a significant acceleration.

Markets reacted immediately. Investors now expect the Reserve Bank of New Zealand to raise interest rates at its September meeting. Higher interest rates generally support a currency, and the New Zealand dollar strengthened following the news.

Interestingly, the inflation surprise occurred just as global energy prices were rising. This serves as a reminder that even a small, open economy such as New Zealand is not protected from global inflationary pressures.

Southeast Asia: Under Pressure from Oil Prices

Southeast Asian currencies remain under pressure from high crude oil prices. The Thai baht weakened by 0.2% against the dollar, the Indian rupee by 0.1%, the Indonesian rupiah by 0.3%, and the Philippine peso by 0.2%. All of these countries are net oil importers, and rising prices are negatively affecting their trade balances and currencies.

Investors are currently paying particular attention to Indonesia. Bank Indonesia is scheduled to hold its monetary policy meeting on Wednesday, and analysts expect the central bank to leave interest rates unchanged. However, given the rise in inflationary risks, this decision could still be reconsidered.

Should Bank Indonesia decide to raise interest rates, the move could support the rupiah. At the same time, it could slow economic growth, which already remains weak. This is the classic dilemma currently facing many central banks across the region.

What Comes Next?

The week ahead promises to be eventful. On Wednesday, Bank Indonesia will announce its interest-rate decision. Later in the week, markets will receive South Korea’s second-quarter GDP figures, Australia’s labor market report, and Singapore’s inflation data. Each of these events could become a new catalyst for the currency markets.

However, geopolitics remains the dominant factor. The conflict in the Middle East continues to evolve, and any new development could trigger another wave of volatility. Investors must be prepared for a wide range of scenarios.

Asian currencies remain frozen in anticipation. They are waiting for new signals—from central banks, economic data, and geopolitical developments. Once those signals emerge, the markets will begin to move again. In which direction remains to be seen.