Is a currency crisis looming?

ALMOST 29 years ago, the Asian Financial Crisis (AFC) was triggered following the attack on the Thai baht, resulting in Thailand being forced to abandon its currency peg to the US dollar and float the local currency.

What followed was a massive attack on other regional currencies as most Asian countries were also vulnerable due to foreign currency debt exposure, twin deficits, and even an unsustainable rise in property prices from heated stock markets brought about by hot money inflows. Thailand, Malaysia, Indonesia, the Philippines, and South Korea all experienced unprecedented market volatility, which led to a free-fall in their respective local currencies.

Businesses were hugely impacted, while governments in the region also came under pressure due to a significant rise in borrowing costs and social unrest.

The contagion impact of the regional crisis soon spread to Singapore, Hong Kong, Taiwan, and Japan, and these markets and economies too were impacted severely.

It took a while before recovery could set in, but with the help of the International Monetary Fund, credit extended to several countries with strict compliance with economic reforms helped the economies to turn around and recover quickly.

Devaluation

The baht, which was the first to be attacked by speculators, halved in value by January 1998 as the currency’s exchange rate against the US dollar rose from 26 before the crisis to 53 to the greenback.

The South Korean won weakened from 900 to almost 1,700 to the US dollar, while Indonesia’s rupiah, which was comfortably trading at about 2,400, had a massive free-fall to almost 15,000 to the US dollar by June 1998.

In the case of Malaysia, our ringgit fell from 2.50 to as low as 4.88 to the greenback.

Malaysia’s response to the crisis was one for the history books. We took the unorthodox approach of imposing capital controls, designating the entire 100 constituents of the FBM KLCI, and pegging the ringgit at RM3.80 to the US dollar.

Malaysia’s move on Sept 2 1998 was seen as a turning point, as that move alone saw speculators turning away from further one-way bets, not only on the ringgit, but also on other regional currencies.

The AFC brought nothing but pain to the people and governments, both economically and financially, as most economies went into deep recession.

Indonesia’s economy contracted by 13.1% in 1998, while Malaysia’s and South Korea’s gross domestic product or GDP contracted by 7.4% and 4.9%, respectively.

The 2026 playbook

The start of war in Iran following the US attack on the sovereign nation saw crude oil prices skyrocket across the globe, and many oil-importing countries found it difficult to manage elevated oil prices.

Disruption in the supply chain not only caused high pump prices, but also impacted trade that passes through the Strait of Hormuz, leaving many countries vulnerable.

As domestic prices rose, so did inflationary pressure, while economic growth also slowed down.

While we are not anywhere close to the 1997 and 1998 economic bubble scenario, one aspect that hit most regional or Asian economies was weaker currencies against the greenback.

Among regional currencies, the most impacted has been the rupiah, which was last traded at 17,940 rupiah to the US dollar, and down as much as 7.5% year-to-date.

The rupiah is now at an even lower level than the low of 15,000 seen during the AFC.

In response to the weaker currency, Bank Indonesia raised rates by as much as 100 basis points (bps) to 5.75%, of which three rate hikes of 25 bps each were carried out in the past month alone.

Indonesia’s issue is not only about higher inflationary pressure, which rose as high as 4.76% in February 2026 before easing to 3.08% in April, but also issues related to government finances as the government attempted to be more people-friendly, adding pressure to its legislated budget deficit targets.

A weaker trade balance due to a surge in global oil prices is another worrying factor, as Indonesia seems to be running against the tide to fund its dollar imports.

The recent issue with respect to the investability of stocks listed on the Jakarta Stock Exchange had also resulted in a massive exodus of foreign funds and increased demand for the greenback.

Other Asean currencies have seen mixed performances, with the baht down 6.1%, the Philippine peso lower by 4.6%, and the Singapore dollar down by about 1% year-to-date.

In the case of the ringgit, the local currency is down 1.8% year-to-date, but from its strongest level of 3.8875, the ringgit has weakened by approximately 6.4%.

Within Asia, the South Korean won is one of the worst-performing currencies, down approximately 7.4%.

The weakness among Asian currencies this time around can be attributed to the surprising rally in the Dollar Index, which is now up by 3.4% year-to-date, and 6.1% from its low in late January 2026.

Higher rates

Other than Indonesia’s 100 bps hike, several central banks have turned hawkish, with the Reserve Bank of Australia raising rates three times so far, while the Philippines’ central bank has raised rates twice this year.

The European Central Bank has raised rates once so far and is expected to raise them by another 25 bps this year, while the Bank of Japan’s benchmark rate hit 1% after it raised its rate by 25 bps in mid-June.

Meanwhile, the all-important US Federal Reserve (Fed) left rates unchanged at its last meeting, but pressure is mounting for the Fed to raise rates at least once this year due to elevated inflationary pressure.

After the headline inflation print hit 4.2% last month, all eyes will be on the core personal consumption expenditure, with the market expecting the Fed’s preferred inflation gauge to come in at 3.3% to 3.4% higher year-on-year.

Hence, the US dollar has regained its strength following economic data suggesting that the Fed will, in all likelihood, raise rates rather than lower the Federal Funds Rate, as previously assumed following the change of guard at the Fed.

The current weakness seen in most Asian currencies is mostly attributable to the strength of the US dollar, especially now that rate hikes are on the table rather than earlier expectations that Kevin Warsh would slash rates as per the US president’s demands for a lower rate.

Having said that, it is doubtful that the Fed will be in any way aggressive in raising rates due to its domestic issues, especially with respect to the government’s ballooning debt and deficit.

The current weakness in Asian currencies is temporary, and they will regain their strength once investors are confident that the Fed is on a dovish path.

The bitter experience of the AFC almost three decades ago is definitely in the past and unlikely to haunt us again, as we are not anywhere near a currency crisis.