Another Asian currency crisis? by mattsteinglass
June 1, 2008, 2:42 pm
Filed under: Uncategorized

Morgan Stanley, in a report that’s not online, is anticipating a stark devaluation of the dong in the near future which could touch off a regional ’97-style currency crisis. The jump in Vietnam’s current account deficit (to $14 billion) and inflation (to 25%) in May, MS writes, caused 12-month futures on the dong to “gap” to a drop of 38% against the dollar. The questions are how long the central bank can defend the dong’s value, how big the drop will be, and whether it will infect other regional currencies: “Vietnam’s fundamental situation is comparable to that of Thailand’s in 1997.”

I confess I find this kind of confusing since a few months ago we were talking about how inflation had been kick-started by the state bank’s attempts to keep the dong from rising against the dollar. Now apparently the inflation caused in part by those attempts has created pressure for the dong to fall against the dollar. Why don’t these effects just balance out and leave the dong nice and stable? I guess you have to be an economist to answer questions like that.

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