What is behind the currency crisis in East Asia and how will it affect
U.S. economic activity?
Beginning in July, 1997, first Thailand, then the Philippines, Indonesia,
Malaysia, Hong Kong, Taiwan, and Korea--one after another--suffered "attacks"
on their currencies; that is, large portions of these currencies were
put up for sale in the markets. These countries tried to fight off the
selling pressures by raising their interest rates, but ultimately, all
but Hong Kong were forced to let their currencies depreciate.
At least two factors led to these attacks. One factor was the link these
countries tried to maintain between their currencies and the U.S. dollar.
The dollar had been appreciating against many currencies, in part because
of our strong economic performance relative to other countries. As the
dollar rose, the linked East Asian currencies moved up with it. In particular,
the dollar and the linked currencies appreciated substantially against
the Japanese yen and the Chinese yuan, which meant that the products of
these East Asian countries grew more expensive relative to Japan's and
China's products. That hurt the East Asian countries' competitiveness
and put pressure on their currencies to depreciate.
The second factor is the banking systems in these East Asian countries.
Many of their banks financed part of their operations with short-term
debt denominated in dollars and other foreign currencies. With their currencies
depreciating, these banks face much higher debt burdens, which means severe
financial hardship for them. Moreover, these banks are saddled with a
lot of bad loans. The result is that these economies face some tough times
ahead, with slowdowns in output and employment.
How will the downturn in East Asian economies affect the U.S. economy?
Much of the impact is likely to be through trade with East Asia. The combination
of a higher dollar relative to those countries' currencies plus the weakness
in their economies will mean a drop in U.S. exports to that region, as
well as some pickup in our imports from there. But our exposure is less
than some people might think--estimates suggest that our exports with
East Asia amount to only about 3 percent of our GDP, and imports about
5 percent. On this basis, most estimates suggest the Asia turmoil is likely
to reduce real GDP growth this year by between 1/2 and 1 percentage point.
But this reduction in growth is not likely to derail the U.S. expansion.
The U.S. economy is currently in very good shape, with strong growth,
low unemployment, and low inflation. Though no one welcomes the troubles
in East Asia, at least they have come at a time when the U.S. economy
appears to be resilient enough to absorb the negative effects.
Huh, Chan, and Kenneth Kasa. 1998. "Export Competition and Contagious
Currency Crises." FRBSF
98-01 (January 16).
Parry, Robert T. 1998. "Prospects for the U.S. and California Economies."
98-06 (February 27).
For Further Reading
Daly, Mary. 1998. "East Asia's Effect on the Twelfth District." FRBSF
98-10 (March 27).