Wall Street's Bulls Send the Bears on a Rampage in Asia

How much is a dollar worth?

The answer used to be simple in countries like Thailand and the Philippines.

Monetary authorities in southeast Asia saw to it that the dollar's value stayed fairly constant in their countries, despite the greenback's battering of the Japanese yen and Europe's major currencies.

A company doing business in Manila could count on the dollar buying 26 Philippine pesos. Similarly, visitors to Bangkok could be assured of receiving 25 Thai baht for every dollar.

But all that has changed, thanks to a wave of speculative attacks sweeping through southeast Asia.

Thai officials were the first to backtrack. They spent between $7 billion and $10 billion defending the baht, before deciding the fight wasn't worth it.

A government often tries to defend, or strengthen, its currency by using dollars to buy its own currency in the money markets. That creates demand and therefore value and strength. But if traders doubt the government has the dollars, or the will, to maintain the defense, it can fail.

The speculators then took aim at the Philippines.

The archipelago's central bank doubled overnight interest rates to 32 percent, hoping the peso would become too expensive to attack.

Philippine stock prices plummeted, and monetary officials spent more than $2 billion intervening in the currency markets deciding to let the peso go.

Speculators moved on to Malaysia, Indonesia (where the rupiah dropped 9 percent this week), and even Singapore and Hong Kong, normally safe havens for currency investors.

The Hong Kong dollar stood the test, but the others face new lows.

Once unleashed, this wave of volatility spread outside Asia as traders decided to test currencies in Poland, Greece, and Latin America, and officials at the US Treasury and the International Monetary Fund are reportedly on "high alert."

The Clinton administration apparently worries that US exports will suffer if the dollar's new strength makes American products too expensive.

But ironically, the booming US economy, and these Asian tigers' inability to keep up, is the main cause of the currency crisis.

With the US economy showing the most strength in three decades, the stock market at record highs, and the US dollar flexing its muscle, investors have little motivation to look elsewhere.

The US gives them the best of all worlds, performance and security. "Why should I take the extra risk to invest abroad when I can get returns like these on Wall Street?" asks one trader.

Thailand's faltering export sector led to a trade deficit widely considered to have triggered the attack on the baht.

As the US dollar surged internationally over the past two years, the stable Thai baht and Philippine peso also became stronger, eroding their competitiveness.

Thai and Philippine products stayed the same price in dollar terms, while goods from exporters such as Japan became cheaper to American consumers.

The Asian tigers have also felt the heat from the dragon to their north. Chinese exports, fueled by cheap labor and government subsidies, surged 25 percent in the first half of the year, displacing exports from Beijing's smaller neighbors.

"There are a lot of [investors] exiting these markets," says Desmond Supple, the head of Asian currency research at investment bank BZW.

"Ultimately that's why the central banks have such limited ability to support their currencies. The cost of intervening against genuine outflows of investment, rather than just speculative outflows, is exorbitant," he says.

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