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October 9th 2008

Asian Forex Reserves Plummet

Developing countries (in Asia) responded to the 1997 financial crisis by prudently building up massive stocks of foreign exchange reserves to mitigate the risk of another crisis. In August, the reserves of eight of these countries (excluding China and Japan) promptly fell by a combined $36 Billion, setting a monthly record in the process. The flow of capital into the developing world has gradually reversed itself over the last year, as investors have fled emerging markets as part of a broad strategy to limit exposure to risk. Central Banks have responded by using their reserves as a means to restoring confidence and to propping up their respective currencies. Unfortunately, such countries remain vulnerable to the whims of institutional investors; while they can use their reserves to cushion the fall, they cannot prevent a collapse if that is what the markets ultimately will. Fortunately, the sheer size of their reserves makes such a repeat regional financial crisis unlikely. The Business Standard reports:

"Uncoupling is a myth. The region still depends on industrial countries to fuel its growth. If the global slowdown extends beyond 2009, the repercussions for the region could be severe."

Read More: Forex reserves of 8 Asian countries down by $36 bn

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Posted by Adam Kritzer | in Central Banks, Emerging Currencies | No Comments »

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