When the US-Iran conflict erupted in late February, its repercussions were felt far beyond the Middle East. As the conflict disrupted global shipping lanes, oil prices surged, fueling inflation and sending ripples of instability through global markets.
As is often the case during periods of heightened uncertainty, many investors gravitated away from what they perceived as higher-risk investments in emerging markets. Instead, they opted to channel their capital into the US dollar, traditionally regarded as a secure safe-haven asset.
This significant shift had a profound and varied impact on numerous currencies worldwide. While some currencies plummeted in value, others experienced increased volatility, and a select few even strengthened.
Oil prices, as André Perfeito, a Brazilian economist leading the consulting firm APCE, noted, “affect everyone… currency fluctuations can amplify or cushion that impact.” This raises a critical question: when combined with other influential economic factors, what do these currency fluctuations truly mean for individual nations and their citizens?
Nations Under Pressure: The Most Affected Economies
Countries that heavily rely on energy imports, particularly oil, immediately felt immense pressure on their currencies. This group includes nations like India, Indonesia, the Philippines, Thailand, and Egypt, all of whom faced escalating fuel costs and persistent foreign exchange shortages.
As investors diverted funds into the US dollar, demand for these countries’ local currencies dwindled, causing their values to weaken considerably. A direct consequence was a dramatic rise in the cost of servicing dollar-denominated debts, further straining national budgets.
Compounding this challenge, crude oil and many other goods—whose transport was already impacted by disruptions in the Strait of Hormuz—are typically priced in US dollars.
When a currency’s value depreciates, imports become proportionally more expensive. This inflationary effect permeates across sectors, influencing everything from gasoline prices to the cost of plastics and fertilizers. Ultimately, the impact translates directly into higher prices for food and everyday essentials in stores, directly affecting ordinary citizens.
In India, for instance, the rupee has depreciated by approximately 5% against the US dollar since the start of the Iran-US conflict, repeatedly hitting new lows as oil prices escalated. This decline merely exacerbated a pre-existing weakening trend for the Indian currency.
In response to these pressures, several central banks implemented defensive measures, including raising interest rates and selling portions of their US dollar reserves to buttress their domestic currencies. Bank Indonesia, for example, took both steps, repeatedly selling dollars and buying rupiah to boost demand.
While higher interest rates mean greater returns for savers, they also translate into more expensive debt repayments for consumers on mortgages and other loans, creating a difficult balancing act for households.
Volatile Currencies and Surprising Resilience
Other currencies exhibited more pronounced volatility, reacting sharply to shifting global market sentiment. Nations such as South Africa, Colombia, Chile, and Mexico fall into this category. Their currencies tend to weaken when investors seek safe havens like the dollar but can quickly rebound when commodity prices rise or risk appetite returns to the market.
Conversely, some energy exporters, including Brazil and Malaysia, actually benefited from higher oil prices. These elevated prices boosted their export revenues and fostered increased investor interest in their economies. Notably, investment banks like Goldman Sachs and Bank of America highlighted strong demand for Brazilian government bonds and corporate stocks in client reports in April, with Goldman Sachs even naming Brazil as a top pick among emerging markets.
However, the picture for Brazil is not without its complexities. Martín Castellano, head of Latin America research at the Institute of International Finance, cautioned that higher energy prices could stoke inflation in Brazil, potentially delaying interest rate cuts and impacting capital flows. Brazil also imports refined products such as gasoline and diesel, which contributes to higher domestic fuel costs.
Furthermore, political uncertainty leading up to presidential elections in October “will increase the risk premium on the exchange rate,” according to economist Luiza Pinese from Brazilian investment management firm XP, in a recent report.
Meanwhile, another group of currencies demonstrated remarkable resilience for distinct reasons. China’s yuan remained relatively stable, partly due to stringent capital controls and policy interventions that effectively limited sharp fluctuations. These measures include restrictions on money flowing into and out of the country, coupled with direct central bank intervention to meticulously manage the yuan’s exchange rate.
The Russian ruble emerged as one of the best-performing currencies against the dollar since the Iran conflict began. This strength is attributed to high energy revenues combined with strict capital controls, including policies mandating exporters to convert foreign currency earnings into rubles and restricting money outflows.
The Response of Developed Economies
At the outset of the crisis, currencies of developed nations generally strengthened as investors sought safer havens. Both the US dollar and the Swiss franc reached peaks before gradually returning to their pre-conflict levels as the immediate shock subsided.
Oil-linked currencies, such as the Norwegian Krone, received a significant boost from the surge in crude oil prices, reflecting their national economies’ reliance on energy exports. Interestingly, the Japanese yen bucked the typical developed market trend, actually weakening. This divergence is largely due to Japan’s substantial dependence on energy imports, making it vulnerable to rising global oil prices.
The Canadian and Australian dollars also benefited from robust commodity prices across a broader spectrum, including crude oil, natural gas, metals, iron ore, and coal. However, broader concerns about global growth and trade tensions somewhat limited their upward trajectory. In Europe, the euro and pound sterling experienced volatility, driven by anxieties over escalating energy costs, persistent inflation, and a potential slowdown in economic growth.
The Outlook: What Lies Ahead?
Economists note that while the initial attacks on Iran prompted investors to flock to safe-haven assets and strengthened the dollar, the US currency has since weakened as the conflict progressed. This depreciation is generally viewed as a positive development for emerging markets.
“A weaker dollar typically means looser monetary conditions, greater room for interest rate cuts in emerging markets, and reduced risk aversion—all of which benefit emerging markets,” stated economists at the UK-based global investment firm AllianceBernstein in a recent report.
The firm further emphasized the dollar’s enduring central role, noting that a significant portion of emerging market debt is denominated in US dollars, and key commodities are also priced in the currency. Consequently, a weaker dollar tends to improve their economic outlooks.
Despite these potential benefits, the IMF issued a cautionary warning in April, indicating that persistent disruptions from the Iran conflict are pushing the global economy towards “adverse conditions.” These conditions are characterized by a challenging combination of weaker growth and higher inflation.
In such a scenario, where oil prices remain elevated, inflation becomes less stable, and financial conditions tighten, global growth could potentially fall to 2.5% with inflation climbing to 5.4%. This contrasts sharply with current projections of 3.1% growth and 4.4% inflation. The IMF also outlined a more severe scenario, where global growth could plummet to 2.0% and inflation could exceed 6%. The institution is expected to update its projections again in July, providing further clarity on the evolving global economic landscape.
Summary
The US-Iran conflict triggered significant global economic instability by disrupting shipping lanes and causing oil prices to surge, which prompted investors to shift capital into the US dollar. This trend severely impacted energy-importing nations such as Indonesia and India, where local currencies depreciated and the cost of servicing dollar-denominated debt rose sharply. In response, central banks in these regions implemented defensive measures, including raising interest rates and utilizing foreign exchange reserves to support their domestic currencies.
Conversely, energy exporters like Brazil, Malaysia, and Russia experienced currency strengthening or increased investor interest due to higher oil revenues. While most developed market currencies initially acted as safe havens, the Japanese yen weakened significantly due to the country’s heavy reliance on energy imports. The IMF remains cautious, warning that sustained conflict and high energy prices could lead to a global scenario of lower economic growth and persistent inflation.