Strategies for Asian Exchange Rate Policy Cooperation

Asian economies have undergone significant transformation since 1997/98 financial crisis. In order to reduce risks of balance of payment crisis, Asian policymakers introduced a number of policy reforms, including promotion of current account surpluses, accumulation of foreign reserves and some regional cooperation initiatives. These changes strengthened Asia external sector fundamentals and helped Asias ability weathering external shocks. However, Asia is not immune from the current global financial crisis. Performance of Asian currencies since the onset of the U.S. subprime crisis has shown significant variation. Some currencies, such as Korean won and Indonesian rupiah, have collapsed by more than 20 percent against the U.S. dollar since mid-2008, while others, such as Chinese yuan and Japanese yen, have either been stable or managed some gains. Different currency performance across the region was attributable to a combination of several factors, including exchange rate policy, economic openness and external sector resilience. Generally more flexible exchange rate regimes after the 1997/98 crisis imply greater currency volatility given the regions very open economy. But perceived higher externals sector weakness also increased vulnerability of some regional currencies, especially Korean won, Indonesian rupiah and Indian rupee.