The year 2007 was a profitable year for the Asian economies as they saw an unprecedented appreciation in their currencies against a weakening US dollar. The currencies of most Asian nations from the Indian rupee to Chinese yuan headed higher. Since the beginning of the year, the Thai baht surged 12% against the dollar and the Philippine peso was up by 10%. Other currencies, including the Korean won, Malaysian ringgit and the Taiwan dollar also appreciated. The Indian rupee experienced a 13% appreciation since early 2007 and was crowned Asia's best performing currency of 2007.
After 35 years, the Canadian dollar became equal in value to the American dollar.
The appreciation of the Asian currencies was not due to US dollar's weakness alone. The currency rise was also the result of healthy economic growth, vigorous capital flows and strengthening balance of payments position. Even the policies of Asian banks to allow a steady currency rise to offset the inflationary pressures of rising commodity prices contributed to the development. Against this backdrop, international investors stockpiled huge assets to ride on the strength of Asian currency. They invested money in emerging markets and as such the stock market indices there soared to record highs.
The practice of China, Japan and other emerging economies to buy US Treasury debt (bonds) with their trade dollars, kept the dollar afloat.
But it also kept the US medium- to- long-term interest rates low since these nations were ready to purchase most of the debt issued by the US government. But when China and Japan decided to stop buying US treasuries, their value plummeted. As such, the US bond rates tumbled and the US interest rates rose. Amazingly, the US dollar fell. Experts opine that the dollar fall is not intuitive common dogma suggests that currencies are directly proportional to interest rates. The dollar decline raised the US fiscal deficit.
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