The recent strength of Asian currencies has any number of commentators expressing doubts about how long it can continue. They are focusing on the wrong side of the equation, however. It's not Asian currency strength but US dollar weakness.
There can be no denying that Asian currencies have recovered very handily. Since August 26, the Indonesian rupiah has gone up against the US dollar by 32 per cent, the yen by 19 per cent and the Thai baht by 12 per cent.
There is a reason for taking that odd date of August 26. It marks the beginning of a sudden weakness of the US dollar against the currencies of the world's next 10 largest developed economies.
Asia (excluding Japan because it's part of G10) may seem to have staged a remarkable currency recovery but it's no more than the weighted average of what the G10 has done against the US dollar.
The key factor here appears to have been the sudden collapse of the Russian economy and its default on foreign debt obligations.
Not only did this savage the value of many American hedge funds but it brought the weakness of Latin America into focus again and highlighted the fragility of US investment exposure in that continent.
In addition, it appears that a number of hedge funds had borrowed heavily in yen (mostly through swaps) to finance their activities elsewhere. They did it because of low yen interest rates and because they thought that what appeared to be a steady downwards trend in the yen would give them additional profits when the time came to convert back to yen and repay the money.
