Asian central bankers seem newly invigorated after last week's defence of the Thai baht. Concerted action defied the seemingly inexorable victory of international speculators over government attempts to impose order in currency markets.
Ever since the early 1995 attack on regional currencies a 'all for one, one for all' policy has been pursued. By promising to lend each other funds in times of crisis the impression of a strategic front against currency vandals, intent on slash and burn trading profits, was shown.
Speculators were squeezed after massive intervention by the Bank of Thailand, high profile support from Asian central banks and the imposition of exchange controls. Regional finance chiefs subsequently revelled in the victory glow, taking the plaudits for intervention.
With Asian governments holding the dominant share of world foreign exchange reserves there was rich symbolism to the incident. The idea of massively leveraged hedge funds beaten back by the collective force of hard-earned Asian savings defending regional economic stability makes for an emotive plot line.
The big worry was of contamination into other currencies. While Thailand has a very different exchange system to most Asian countries, copycat selling by speculators was on the mind of all bankers. Now, with regional currency markets apparently calm the question is whether central banks have drawn a line in the sand, or if the victory was essentially pyrrhic. First the facts: Thailand's fixed currency system survived because a critical mass of panic-selling never materialised. Huge buying of baht by the Bank of Thailand (BOT) stemmed the rout. Support from the Hong Kong Monetary Authority and the Monetary Authority of Singapore showed nothing more than intent. Both simply borrowed dollar reserves from the BOT, bought baht and then deposited the funds with the central bank. The action was simply money circulating in a high profile loop.
Interest rates remain the main defence mechanism of any central bank. Speculators sell borrowed funds which they hope to buy back cheaper after de-valuation. Central banks fight them by jacking up interest rates making the cost of borrowing ruinously high.