Indonesia's currency, the rupiah, plunged 4 per cent against the US dollar to hit 8,630, its lowest level for five months. It has now fallen more than 8 per cent over the past five days, making it the world's worst performing currency.
The stock market tumbled 4.5 per cent as investors sold out across the board on mounting worries over East Timor and the falling rupiah. The Thai bhat fell 1.2 per cent, the Philippines peso lost 1 per cent and the Singapore dollar eased 0.2 per cent. The Thai stock market fell 1.2 per cent.
Market concerns were fuelled by the World Bank, which said it was "deeply concerned" by the violence. The market interpreted the remarks as a veiled threat that the $5.9bn pledged to Indonesia by international donors in June was conditional on Indonesia fulfiling its promises over East Timor.
"This issue was, and continues to be, of paramount concern to our shareholders who constitute Indonesia's key international partners," the World Bank said. "We join with the International Monetary Fund...in supporting a rapid response to the deteriorating security situation, in order that initiatives for economic recovery and poverty reduction may proceed."
Meanwhile the IMF said the world's financial markets were still "fragile" with potential risks including lingering jitters from the Asian crisis. "Conditions in financial markets remain fragile, as evidenced by continued high levels of volatility...and capital flows to the emerging markets that are running well below the rates during the boom years," it said.
Dealers in Jakarta said there were also fears that a boycott on exports could threaten the country's trade, while the East Timor violence could damage foreign investors' confidence.
Peter Thomson, head of forex at ANZ bank, said: "There is an exodus of funds out of Indonesia. The market is dead scared the IMF and World Bank could stop their funds."
Janet Henry, an Asia economist at HSBC in London, said: "It will remain very vulnerable to the political issues. When the rupiah suffers downward pressure the other currencies get affected." She said she was surprised how well the rupiah had held up, compared with the fall of Suharto in May last year when it hit 15,000 against the dollar.Reuse content