THE ASIAN CURRENCY CRISIS AND ITS IMPACT ON EXCHANGE RATES

The connection between currencies in a region was never more apparent than with the advent of the Asian Financial Crisis in 1997

. Thailand and four other countries were experiencing huge growth in the 1990s before becoming too ambitious. Foreign debt led to the baht cutting its safety link with the US dollar and collapsing. The rest of the region's exchange rates fell with the baht and these nations were all to experience severe poverty as a result of this financial mess.

The Asian Financial Crisis began in July 1997 and caused panic throughout the entire region. The possibility of it spreading and affecting exchange rates all over the world was very real at one stage. Up until the crisis, Southeast Asian economies were able to maintain high interest rates which were exceedingly attractive to foreign investors as the chances of a high rate of return were extremely good. Countries in the region such as Thailand, Malaysia, Indonesia, Singapore and South Korea received a large inflow of money and saw their economies experience extraordinary growth of up to 12%. At that point in time, this was known as the Asian economic miracle'.

Then the bubble burst in spectacular fashion. Thailand overextended itself on the real estate market and incurred serious foreign debt. Their government unwisely decided to float their currency, the baht, thus cutting its link to the US dollar. This was to lead to the collapse of the currency as it was not strong enough to sustain itself. Malaysia and Indonesia also got themselves into a similar mess and as a result the crisis spread like a virus throughout the region. The exchange rates of currencies like the yen fell like a stone with the amount of debt ever-increasing.

The prices of assets were wildly overvalued and all countries in the Southeast Asian region suffered from trade deficits that were simply unsustainable. This led to investors and hedge fund managers panicking and selling the Thai baht as well as currencies from the other nations involved in the crisis. They hoped to benefit from the problems and the Southeast Asian economy soon descended into absolute chaos. The exchange rates of their currencies fell dramatically against major currencies like the pound sterling and US dollar.

The crisis was to have a long term effect on the Southeast Asian economy with asset prices, stock markets and exchange rates falling significantly in 1998. This led to a collapse of businesses in the area with millions of people in South Korea, Thailand and Indonesia falling below the poverty line. Raising interest rates in the region did nothing to prevent the fall of their currencies. High profile financial and political figures resigned from office while a strong anti-Western sentiment rose amidst the people.

The Asian Financial Crisis showed how interdependent the economies of Southeastern countries were. When Thailand started to experience difficulties, the economies of the rest of the nations nearby collapsed in rapid succession. The crisis had a huge effect on the global economy with the Forex market going crazy. While some traders made a significant profit dealing with the falling exchange rates, many more saw their investment vanish.

THE ASIAN CURRENCY CRISIS AND ITS IMPACT ON EXCHANGE RATES

By: Maureen Holland

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