Thailand, which suffered a minor assault during the peso crisis, seems most vulnerable to attack by speculators. This view is shared by foreign exchange dealers and the Thai government's top policy makers, who have made it clear that they do not intend to be a sitting duck.
Thailand's central bank governor, Rerngchai Marakanond, recently told regional currency dealers that his bank would not hesitate to enter both spot and forward currency swap markets to defend the local currency. "While we don't want to be tested, we are prepared and equipped to do whatever is necessary to preserve the value of our currency. An attack on the [Thai] baht will be considered as a direct attack on the Bank of Thailand and it will be dealt with accordingly."
This is more than just bluster. At the beginning of the month, foreign exchange dealers in Asia were swamped with rumours about a possible devaluation of the baht. This, combined with worries about the coalition government which runs Thailand, produced intense pressure on the currency.
Alarmed by the level of speculation, the Bank of Thailandwent into both the Hong Kong and Singapore markets and spent an estimated US$1.8bn to shore up the baht.
Behind Thailand's determination to protect its currency against speculation stands a growing sense of solidarity among the region's central bankers, crystalised in November by a meeting in Hong Kong where they pledged support through repurchase or "repo" agreements to provide the liquidity required for banks to fight off attacks by speculators.
Hong Kong, for example, has six repo agreements, including one with Thailand. Singapore also has an arrangement with Thailand but kept away from the Hong Kong meeting. This may be because it feels strong enough to act alone. It houses the world's fourth-largest forex market and its currency is among the four most widely traded Asian currencies, alongside the Thai baht, the Indonesian rupiah and the Malaysian ringgit.
Most Asian currencies are largely tied to the United States dollar. In addition, the Asian countries have an impressive pool of foreign currency reserves, estimated to have reached US$420bn as of September 1995. The considerable liquidity of the currencies belonging to the export-led states of South-east Asia and their link to the US dollar make them an obvious target for speculators.
Thailand is vulnerable, despite its foreign exchange reserves of some US$40bn. Short-term foreign debt, mostly in the private sector, exceeds this amount and has been growing rapidly. In addition the current account balance remains in the red. These factors led the US credit rating agency Moody's to warn, in May, that Thailand was vulnerable to "financial shock" and state that it was contemplating downgrading its prime-1 rating for sovereign short-term debt.
The Moody's report sent shockwaves throughout the Thai financial community and drew an angry response in some quarters. However the people taking most careful note were the currency speculators.
A senior central bank official, Thirachai Phuvanatnaranubala, told the dealers' meeting that foreign speculative trading on the baht in South- east Asia amounted to about US$1.2-US$1.3bn a day. However the Thai authorities are more wary of the massive US hedge funds which often move in herd-like fashion and have shown an active interest in the Thai baht.
A central bank official said the authorities had a good idea who the speculators were but preferred to deal with the problem by creating an unfavourable environment for attacks on the currency.
However, even more firmly based currencies, such as the Hong Kong dollar, backed by a foreign exchange battle chest of US$60bn, are vulnerable to speculators. Earlier in the month, Sunday Business published an erroneous report that the currency speculator George Soros had taken short positions in the local currency. As a result the Hong Kong dollar, tied to the US dollar at a rate of HK$7.8 to US$1, fell as low as HK$7.74. Every movement of a fraction of a percentage point spells the shift of millions of dollars and does so on the basis of unsubstantiated rumour.
Earlier this year, Hong Kong's financial secretary, Donald Tsang, warned speculators against attacking the Hong Kong dollar, pointing to the heavy losses incurred by speculators when the currency came under attack early last year.
Some of the big shifts in Asian currency values can be explained by something other than pure speculation. Nevertheless, the movements can be dramatic. In the past five years the Singapore dollar has appreciated by about 25 per cent while the Indonesian rupiah depreciated by about the same amount.
The focus on Asian currencies is likely to become more widespread as restrictions on the convertibility of some controlled currencies are relaxed. Taiwan and South Korea are moving towards a more liberal regime and China is makingpledges to make the renminbi convertible. Even Vietnam, which lags well behind in the convertibility stakes, is saying that controls will be further relaxed. If nothing else, these moves will give currency speculators more choice.
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