From tariffs to the conflict in the Middle East, a series of external shocks is weighing on growth, fuelling inflation and increasing volatility across Southeast Asian financial markets.
When military action disrupted traffic through the Strait of Hormuz earlier this year, Dubai crude oil, a key benchmark for Southeast Asian economies, more than doubled in just three weeks. Prices climbed from roughly $60 a barrel to a peak of $137.82.
Although oil prices had eased by mid-June, the shock had already begun to reshape inflation expectations across the region. The Asian Development Bank projects that inflation in Southeast Asia could almost double, rising from 3.0% in 2025 to 5.6% in 2026. At the same time, regional economic growth could slow from 5.4% to 4.7% if the disruption continues into the third quarter.
The combination of higher energy costs, weaker trade prospects and currency volatility is creating a difficult environment for governments, central banks and investors.
How external shocks feed into domestic markets
Southeast Asian economies are heavily dependent on energy imports from the Middle East. According to S&P Global analysis, around 90% of the crude oil shipped through the Strait of Hormuz is destined for the Asia-Pacific region.
Thailand is particularly exposed: slightly more than half of the crude oil and condensate it imports comes from the Middle East. Vietnam is even more dependent, with around 85% of its oil imports originating in the region.
That concentration means disruption at a single maritime chokepoint can quickly translate into higher costs at home.
Rising oil prices affect inflation through several channels. Higher energy costs increase the cost of manufacturing, while more expensive shipping pushes up the price of imported goods. Domestic food prices may also come under pressure as fertilizer costs rise, given the Middle East’s importance as a fertilizer supplier to the region.
U.S. tariffs have added another layer of uncertainty. Export-oriented economies such as Thailand and Vietnam initially benefited from companies shifting production to Southeast Asia to avoid higher tariffs elsewhere, bringing increased exports and foreign investment.
But the same trade measures have also contributed to supply-chain disruption and greater uncertainty. For many Southeast Asian exporters, higher production and logistics costs have squeezed profit margins, with some manufacturers absorbing part of the additional costs rather than passing them on to customers.
Currency volatility intensifies
The combination of economic uncertainty, inflation risks and trade tensions has increased volatility across Southeast Asian currencies, while encouraging investors to seek the relative safety of the U.S. dollar.
The impact, however, has varied significantly from one economy to another.
The Indonesian rupiah has remained close to record lows against the dollar despite intervention by Bank Indonesia aimed at supporting the currency. Vietnam’s dong had already weakened against the dollar in 2025, and further volatility could persist as higher inflation and rising manufacturing and shipping costs weigh on export demand.
Thailand has also seen sharp movements in its currency. The baht had been gaining ground against the U.S. dollar before the escalation of the Middle East conflict triggered a reversal, pushing it to a 10-month low.
Central banks face a difficult balancing act
For Southeast Asian policymakers, the combination of rising inflation, slower growth and currency instability presents a particularly difficult policy dilemma.
Central banks could raise interest rates, or delay planned rate cuts, in an effort to contain inflation and support their currencies. But tighter monetary policy could also weaken domestic demand at a time when economies are already facing the prospect of softer global demand for their exports.
The Bank of Thailand has indicated that it plans to keep its policy rate at 1% for “as long as possible.” It has also said it will adopt a “look-through strategy” towards the inflation spike caused by the conflict involving Iran.
The reasoning is that inflation driven by an external supply shock may be better managed through economic stability than through rate increases that could unnecessarily suppress domestic demand.
Vietnam has taken a similar approach by keeping interest rates unchanged. At the same time, the State Bank of Vietnam has encouraged commercial banks to reduce deposit rates and make borrowing cheaper for households and businesses in an effort to support economic activity.
Indonesia, by contrast, has raised interest rates twice since the conflict in the Middle East began, seeking to stabilize the rupiah and contain inflation, which reached 4.76% in February.
How investors are responding
Investors are also adjusting to the combination of inflation and currency risk.
Retail investors have been diversifying into assets perceived as safe havens, with gold remaining a popular choice. Others are turning to foreign-currency deposit accounts as a way of reducing their exposure to swings in domestic currencies.
Foreign direct investors, meanwhile, are increasingly using hedging strategies to manage exchange-rate risk. Futures, options and swaps can all be used to limit the impact of sharp currency movements.
Oil remains the key variable
Looking ahead, the trajectory of oil prices may prove to be the most important factor shaping the region’s currencies and monetary policy.
A sustained return towards pre-conflict oil prices could give central banks more room to resume rate cuts and help stabilize currencies. Further escalation, however, could intensify inflationary pressure, weaken currencies and make monetary easing more difficult.
For investors in Southeast Asia, oil is therefore more than just a commodity input. It has become the central macroeconomic variable linking energy costs, inflation, interest rates, trade and currency risk across the region.
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