The latest surge in global oil prices could put pressure on the currencies of some crude importing emerging market countries by raising the risk of bigger current account deficits and weaker growth.
US crude futures hit new peaks above $44 a barrel on Tuesday after Opec President Purnomo Yusgiantoro said the bloc of oil producing nations had no extra crude to supply the market.
While Asia was likely to be the worst affected region, the oil price surge was also bad news for oil importers like Turkey and Hungary, already struggling to keep their current account deficits in check in the face of rising fuel bills.
Alex Garrard, emerging markets analyst at UBS, singled out Turkey as being particularly vulnerable given that its current account lurched deeper into the red this year.
"Clearly, external balances are a major focal point at the moment and oil is a significant marginal contributor to the balance of payments."
Turkey's current account deficit is expected to reach $11.6 billion by the end of 2004, having exceeded the government's target for the full year by the end of May when it climbed to $8.881 billion.
"Every dollar on a barrel of oil adds around $270 million to the import bill over a full year," said Garrard. Moves on that scale would inevitably entail a significant depreciation of the lira to compensate, he added.
The one saving grace for Turkey is that the summer months usually see strong foreign inflows from the peak tourist season, which should at least partially offset the impact from more oil price hikes.
Garrard said Hungary's large current account deficit also made it potentially vulnerable to higher crude prices, though analysts played down the risks for Eastern Europe as a whole.
Koon Chow, emerging markets currency strategist at CSFB, said expensive oil was not a clear negative for the region's currencies because in raising inflation expectations it also added to the chances of interest rate hikes.
Asia is perhaps the region most at risk from persistently high crude prices, with countries like India, South Korea, Taiwan, Singapore and China among the major net importers.
"Eastern Europe is vulnerable, but people don't usually talk in terms of the impact on the current account, but rather on inflation, whereas in non-Japan Asia the focus is on the impact on growth, the current account and domestic purchasing power," said Chow.
The Singapore dollar hit near three-month lows against the US dollar and the Thai baht one-year lows last week. Both were dented again on Tuesday, with oil prices seen a major factor behind their weakness.
North Asian currencies like the South Korean won and Taiwan dollar are also seen at risk.
One big worry is that higher fuel costs add to the danger of a sharp slowdown in the region's economic powerhouse, China. China was a net oil exporter 11 years ago but now imports more than 40 percent of its oil needs.
Some analysts contend that the relationship between oil prices and Asian currencies is a complex one and needs to be viewed in a broader economic context.
"Higher oil prices need to occur in the context of diminishing economic optimism to bring about weaker Asian currencies - in part because of the role played by Asian authorities' preferences," said analysts at Bank of America in a research note on Monday.
Taking the example of South Korea, the bank said increased optimism on the global and domestic economies was coupled with a strengthening of the won and oil prices in the early part of 2004.
A less rosy economic outlook now may help explain why Asian currencies are more inclined to fall in line with soaring oil prices than earlier in the year, particularly with the risk that weaker demand hits a major export - semiconductors.
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