A Forex View From Afar

International Monetary Fund in Asia

Learning from the mistakes made in the past, Asian countries have come to an agreement to set up a currency fund to defend the local currencies. Thirteen Asian countries, including Japan, China and South Korea will contribute to form a $120 billion rescue fund.

About ten year ago, south East Asia passed through a severe crisis as their local currency took steep plunges in a very short period. Back then, the IMF bailed out the economies of a number of countries by issuing loans worth of $100 billion and imposed some very strict conditions.

These days, the Asian countries want to avoid, at all costs, errors made in the past. This fund is meant to protect the currency of only some of the countries, but not all at the same time. However, it is very unlikely a speculative attack would be initiated against the Chinese Yuan, since China has the largest foreign reserve in the world, or against the Japanese Yen, which is one of the most traded currencies in the world.

Japan has expressed an interest to protect the Asian and other emerging currencies. A few weeks back, Japan had agreed with the IMF for a $100 billion loan, which would be used to protect the emerging economies on the brick of a crisis. Overall, this is not a big surprise that Japan would express such an interest, since a large bulk of its exports goes to the emerging economies. Japan exports to China, and the ASEAN countries, almost as much as it exports to the U.S. and the Euro-area put together.

The plan to create a common pool of foreign reserves is very good, and it might create an initiative to take another step forward, maybe towards a better inter-state cooperation. However, things go very slow between Asian countries, so it will be very interesting to observe how things will evolve. Until now, most of the Asian emerging currencies have endured some strong declines in the last period, as investors exit their investments.

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