Geopolitical developments in the Middle East have been driving FX markets. A ramping up of tensions lead to higher oil prices and risk aversion – thereby broad USD strength against most currencies. Whereas a dialing down of tensions trigger lower oil prices, an improvement in risk sentiment and the USD’s depreciation. The USD has become synchronous with oil prices. The USD is in such a unique position due to the US’s energy self-sufficiency, limited economic linkages with the Gulf, and its traditional role as a “safe haven”.
The FX market behaved similarly during the initial stages of the Russia-Ukraine war in 2022, when oil prices also rose. That said, one key difference this time around is that the US Federal Reserve is not in the midst of a hiking cycle – which was the case in 2022, and rapid rate hikes had been another factor supporting and extending the USD’s appreciation then. In fact, in the months and quarters prior to the Middle East conflict, the Fed was actually cutting interest rates and the USD was on a weakening path.
We will be paying close attention to the extent of which shipping traffic through the Strait of Hormuz normalize, and whether the positive correlation of the USD and oil weakens. These will help us decide whether to move on from the Middle East headlines and go back to focusing more on fundamentals (such as interest rate differentials and FX valuation) and other market themes (for example, US “sectoral” tariffs and an upcoming change of the Fed’s chairperson). Our base case is that the soft USD trend that was in place before the conflict can come back into the frame.
Asian FX: Caution still warranted
All Asian currencies weakened against the USD during the surge in oil and gas prices. There were no exceptions, even for the MYR (despite Malaysia being a net exporter of gas) and IDR (despite Indonesia being a net exporter of coal).
Energy importers have to buy more USD to pay for their larger energy import bills. Beyond that, there are still many other factors putting depreciation pressure on Asian currencies. Higher energy prices raise inflation, thereby depressing a currency’s international purchasing power. Higher costs of energy, shipping and oil-related raw materials, as well as a physical oil and gas supply crunch will slow growth (due to diverted expenditure and energy conservation) and could even increase fiscal risks (because of larger energy subsidy bills, reduced tax revenue, and ramping up of counter-cyclical support, for example). There have indeed been substantial equity and bond portfolio outflows from Asia. There are also economic linkages between Asian economies and the Gulf to consider for more medium-term implications. The Gulf is not only a supplier of raw materials, it is also a destination for Asia’s exports as well as a source of tourism revenue, remittances and capital flows.
Therefore, until we see oil prices clearly on the path of returning to pre-conflict levels, we think some caution towards most Asian currencies is still warranted. That said, we believe there will be a few currencies that are relatively resilient compared to others in the region, such as the RMB, SGD and MYR.
MYR: More resilient than many others, but not immune
The MYR depreciated modestly recently due to positioning adjustments (investors were relatively more bullish on MYR assets within Asia prior to the Middle East conflict) and emerging questions about how fuel subsidies could affect Malaysia’s fiscal metrics, and whether FDI and portfolio inflows would slow down if external risk appetite remains weak for long.
If oil prices stay high for a prolonged period of time or even rise much further, those concerns will likely intensify. An improvement in the terms of trade – higher gas prices and also palm oil prices – can support the trade surplus and shield the MYR to a certain extent, but it is unlikely to outperform the USD. In recent years, Malaysia’s FX supply has not only been coming from net exports of goods (commodities and electronics-related), but also inbound tourism revenue (which reached a record high in 2025), bond inflows from foreign investors and foreign direct investment (to build data centers and AI infrastructure, for example). All these other sources of FX supply can potentially be curtailed by higher fuel prices and weaker risk sentiment.
Conversely, if there is an improvement in the external situation, we expect USD-MYR to resume its downtrend that was in place before the Middle East conflict. FX turnover onshore continued to stay high in recent months – these suggest that local corporates are still repatriating and converting their FX earnings. The Malaysian economy grew robustly through 2025 (5.2%) and 1Q26 (5.3%). Since mid-2025, outward direct investments by local companies and outward portfolio investments by residents both slowed down notably. We believe that reflects increased confidence in Malaysia’s growth prospects, domestically. Hence, if the external backdrop was to become less averse, the MYR can perform according to its originally strong domestic fundamentals. Our base case has USD-MYR lower by the end of the year.
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- This report is dated 17 Apr 2026.
- All market data in this report are as of the close of 17 Apr 2026, unless a different date and/or a specific time of day is indicated in the report.
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