Indonesia's rupiah breached a historic threshold on Thursday, falling to 18,028 against the US dollar — its weakest level ever — as surging energy costs driven by the ongoing US-Israel war on Iran continue to reverberate through Southeast Asian economies. The currency has now lost more than 7 percent of its value this year, making it Asia's worst-performing currency according to Bloomberg News.

The rupiah's slide reflects a fundamental shift in Indonesia's trade position. As a net oil importer, the Southeast Asian archipelago — home to around 280 million people — is acutely exposed to rising crude prices. The country's trade surplus collapsed to just $89 million in April, down sharply from $3.3 billion the month before, drastically reducing the supply of dollars flowing into the domestic market. Permata Bank chief economist Josua Pardede described the 18,000 level as a "psychological threshold" for investors, noting that dollar demand is being driven simultaneously by energy import costs, raw material purchases, dividend payments, and foreign debt obligations. "This is why the increase in the Bank Indonesia lending rate and intervention is not enough to reverse the rupiah's depreciation," he said.

Bank Indonesia, the country's central bank, raised its benchmark lending rate by 0.5 basis points to 5.25 percent last month — its first rate hike in two years — and says it is deploying "all available policy instruments" to maintain foreign exchange liquidity. It has also tightened controls on dollar purchases, requiring buyers of more than $25,000 per month to submit supporting documentation justifying their need for the currency. Despite these measures, analysts suggest the structural pressures are too significant for monetary policy alone to reverse, particularly as Gulf hostilities continue to push oil prices higher.

The economic fallout from the Middle East conflict extends well beyond Indonesia. Across East Asia, nations dependent on Middle Eastern oil are grappling with shortages of naphtha — a crude oil derivative used to produce plastics, adhesives, printing ink, and medical supplies. In Japan, supermarkets, bakeries, and takeaway outlets are running short of plastic bags, food trays, and hygiene gloves, with polyethylene bag production down 62 percent in March compared with the previous year. South Korea and Taiwan are facing similar pressures, with plastic bag prices surging and governments urging citizens to avoid panic-buying. Compounding regional anxieties, the United States has proposed additional import duties of up to 12.5 percent on goods from 60 economies, including Indonesia, Malaysia, and Singapore, over alleged forced labour concerns.

The convergence of an energy price shock, a deteriorating trade balance, and new trade barriers underscores how the Middle East conflict is transmitting economic stress far beyond the region. For Indonesia in particular, the government faces a difficult balancing act: maintaining subsidised fuel prices to shield consumers while managing a currency under severe pressure and a central bank with limited room to manoeuvre.