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Indonesia rocked by currency collapse

Indonesia yesterday succumbed to the attacks of speculators and allowed its currency, the rupiah, to devalue on the foreign exchange markets, the third such victim of the financial turmoil which has shaken South- East Asian economies in the last six weeks.

The dollar rose by 130 rupiah on the previous day to close at an all- time high of 2,780 rupiah yesterday, after the Indonesian central bank abandoned attempts to defend the value of its currency. "Theoretically, it's a free float," said Sudradjad Djiwandono, the bank's governor.

"You can also call it a managed float without a band."

The situation is similar to the sterling crisis which forced Britain to drop out of the European exchange rate mechanism (ERM) in 1992. The rupiah has hitherto traded in a narrow band, announced in advance by the central bank in order to promote stability in the financial markets.

On Wednesday, Bank Indonesia is believed to have sold between $200m (pounds 126m) and $500m in an attempt to beat off the depredations of currency speculators who were trading on the hunch that the rupiah's stated level is not supported by the fundamental strength of the country's economy. Yesterday, like Britain in 1992, the bank concluded that the price of defending its currency exceeded the cost of letting it to slide.

Last month the Thai baht and the Filipino peso were both devalued in a regional crisis which has drastically undermined confidence in the vaunted "tiger economies" of South-East Asia. At a regional meeting in Malaysia last month, ministers angrily blamed the currency turmoil on the billionaire speculator George Soros, whose Quantum Fund also played a key role in the ERM sterling crisis.

Mr Soros supports a charitable foundation campaigning for democracy in Burma, and the Malaysian prime minister, Mahathir Mohamad, accused him of deliberately undermining the region's governments because of the Burmese junta's admission to the Association of South-East Asian Nations.

But to most economists, the activities of Mr Soros and others look more like a natural response to weak economic fundamentals. Thailand, long a buoyant economy, has been suffering from sluggish growth, a swelling trade deficit and negative equity; at a meeting in Tokyo this week, Asian governments and the International Monetary Fund came up with $16bn to bail the country out. Indonesia's economy has been relatively healthy, but the recent devaluation and the increase in the cost of the dollar will increase the repayment costs of Indonesia's $55.5bn of foreign debts.