Is the Asian Financial Crisis getting re-surfaced?

Press Release

The currency markets are witnessing huge swings in recent times on concerns of US fed tapering its easing measures. The Indian rupee had fallen by more than 15% this year and had breached 65 against the US dollar last week despite the measures introduced by finance ministry and Reserve Bank of India respectively. Brazil Lira had also fallen by more than 15% this year and was beyond 2.45 against the US dollar last week. Russian rouble had fallen by close to 8% this year and was at 33 against the US dollar by end of last week. Indonesian rupiah had fallen by close to 14% this year against the US dollar. The Chinese Yuan remained stable and was at 6.12 against the US dollar.

The rapid fall in Asian currencies recently has once again revived the fears of 1997 Asian Financial crisis. At that time investor’s panic reaction and massive withdrawal of funds resulted in the collapse of the Thai baht and then the crisis spread throughout Asia. On account of shortage of capital, Asian countries suffered shortage of credit and put them in deeper crisis. In recent years the Asian Capital markets have seen huge inflows since the sub-prime crisis and outflows are witnessed in the current year on account of possible tapering by the Fed and further create pressure on their currencies. S&P in a recent report “For Asia-Pacific Sovereigns, Capital Outflows Are Likely To Be Disruptive Not Destructive” has highlighted “the pain will be more for countries with high current account deficits and could undermine their creditworthiness. Countries in the Asia-Pacific region could see a sharp outflow of capital, raising financing costs for companies and increasing exchange rate volatility with improved economic conditions in the euro zone and the US.”

Last week end at Jackson’s hole symposium economists had raised concerns that a premature policy tightening by the Federal Reserve is a major risk for US economy. The US dollar index closed at 81.361. The recent minutes of from the Federal Reserve’s July meeting showed almost all officials support a slowing of bond buys later this year, depending on the data. A few members emphasized the importance of being patient and evaluating additional information on the economy before deciding on any changes to the pace of asset purchases. The recent communications from US Fed has sent mixed signals and huge swings across markets such as the surge in US bond yields, dip in Asian currencies, drop in equities and volatile commodity movements. A better clarity in their communications in relation to tapering is what the markets are looking for.

The Australian dollar was 0.9030US$ at the end of last week. It recovered a bit last week after private sectors data showed Chinese manufacturing growth is on the rise. The Japanese Yen had closed at 98.72 Yen against the dollar at the end of last week. It was at a three week low against the Dollar last week as there was expectation for restating the case for more monetary easing. The Euro was1.3383$ at the end of last week. It remained supported after data showed that manufacturing activity in the euro zone expanded at the fastest pace in 26 months in August 2013 however weakened a bit after the fed minutes. The British Pound was 1.5569$ at the end of last week. It weakened as a senior policy maker in Bank of England stated that smooth economic recovery is not yet assured and the Bank of England has not ruled out fresh stimulus measures. Swiss franc fell last week as it‘s trade balance fell and it closed at 0.9222 franc against the dollar. European currencies witnessed less swings on account of possible tapering by the US Fed.