Covid-19 shows up Asia’s vulnerability to a strong dollar in a crisis

Following the Bretton Woods agreement, maintaining a stable and competitive exchange rate has been one of the cornerstones of Asian industrialisation strategies, at least until the Asian financial crisis of 1997-98. To what extent have Asian exchange-rate regimes evolved over the past two decades?

The latest available International Monetary Fund report on exchange-rate arrangements reveals that many smaller economies in the region continue to have either fixed (Hong Kong) or heavily managed (Singapore) exchange-rate regimes. At the other end, larger Asian economies such as Japan and South Korea have relatively more flexible regimes, while India has swiftly moved in this direction since 2016 when it officially adopted an inflation-targeting regime.

China has, for a long time, walked an unconventional path. Despite having a large domestic economy, China relied on a heavily managed exchange-rate regime for decades, given its dependence on the external sector for growth. While this has led to periodic accusations in the United States of currency manipulation, China has been transitioning to a more flexible market-determined exchange-rate regime, driven largely by its efforts towards rebalancing its economy and developing its financial markets.

Some emerging markets in Asean such as Malaysia and Vietnam have chosen to manage in the middle, giving up some monetary policy autonomy and exchange-rate fixity while managing capital flows to deal with volatility.

Others such as Indonesia, the Philippines and Thailand, which have also managed in the middle, appear recently to have favoured a move towards greater exchange-rate flexibility while strengthening the use of interest rates to target inflation.