The Asian financial crisis: when dollar debt met falling currencies
In the mid-1990s, Thailand, Korea, Indonesia and Malaysia were among the fastest-growing economies in the world, and foreign money poured in. Much of it was short-term and in dollars. When Thailand's currency gave way in July 1997, investors fled the whole region at once. The crisis reshaped how emerging economies manage their currencies, and it still explains why many of them hold huge reserves today.
From one currency to a whole region
- Before 1997Boom on borrowed dollarsCurrencies were pegged or tightly managed against the dollar, so borrowing in dollars at low rates looked safe. Banks and companies borrowed short-term abroad to fund property and expansion.
- 2 Jul 1997Thailand floats the bahtAfter spending most of its reserves defending the peg, Thailand lets the baht float. It falls from about 25 per dollar in June to about 53 by January 1998.
- Jul–Dec 1997ContagionInvestors pull money from Malaysia, Indonesia, the Philippines and then Korea. The Korean won falls from about 890 per dollar in June to 1,695 by December.
- Aug–Dec 1997IMF rescuesThailand, Indonesia and Korea receive IMF-led packages, with conditions: higher interest rates, budget cuts, bank closures and reforms. Korea's, agreed in December, is the largest of its time.
- 1998Deep recessionsIndonesia's rupiah, about 2,450 per dollar in mid-1997, averages nearly 15,000 in June 1998. Output falls sharply across the region, and in Indonesia the crisis contributes to the fall of President Suharto in May 1998.
Why a falling currency became a crisis
A weaker currency is normally a cushion. With large dollar debts, it became a trap.
When the currency halves, a dollar loan costs twice as much in local money. Companies and banks that looked healthy became insolvent overnight, without anything else changing.
Much of the borrowing had to be rolled over every few months. When foreign lenders refused, countries had to repay with their reserves, which ran out. That forced the currency down further.
Investors did not wait to study each country. They pulled money from the whole region, which created the very crises they feared, even in economies with different problems.
- Exchange rate
- The price of one currency in terms of another. When a currency weakens, imports cost more and exports become cheaper for foreign buyers.
- Contagion
- When trouble in one market or country spreads to others, often because investors pull money from anything that looks similar, not because the others have the same problems.
- Currency intervention
- When a government or central bank buys or sells currencies to move its exchange rate. To support a weak currency, it sells foreign reserves, usually dollars, and buys its own currency.
- Current account
- The broadest measure of a country’s transactions with the rest of the world: the trade balance, plus income earned on foreign investments, plus transfers. A deficit has to be financed by borrowing from foreigners or selling assets to them.
- Imported inflation
- Inflation that comes from abroad: higher prices for imported goods and energy, or a weaker currency that makes every import more expensive.
A fast rebound, and a new rulebook
Once the panic passed, the weak currencies made exports very competitive. Korea returned to growth in 1999, helped by restructuring and by public efforts such as a national campaign in which citizens donated gold to help repay foreign debt.
Asian governments built large foreign exchange reserves as insurance, let their currencies float more freely, and reduced short-term foreign borrowing. They also became wary of IMF conditions, and set up regional swap lines among themselves.
What assets did in the Asian crisis
Money fled Asia for US government bonds and the dollar. Oil and gold fell with Asian demand.
| Asset | Period | Move | What happened |
|---|---|---|---|
| Korean shares | Jun 1997 → Jun 1998 | −59% | −74% for a dollar-based investor, as the won also fell. They then rose 214% from June 1998 to December 1999. |
| US shares | Jun 1997 → Dec 1998 | +26% | US markets wobbled, notably in October 1997 and August 1998, but kept rising. |
| US 10-year yield | Jun 1997 → Oct 1998 | 6.49% → 4.53% | A flight to safety: investors bought US government bonds, pushing yields down and prices up. |
| US dollar | Jun 1997 → Aug 1998 | +17% | Against major currencies; against the baht, won and rupiah the rise was far larger. |
| Oil (WTI) | Jun 1997 → Dec 1998 | −41% | To $11.28 a barrel as Asian demand collapsed. |
| Gold | 1997 → 1998 (annual average) | −11% | $332 to $295 an ounce: gold did not act as a safe haven this time. |
Monthly averages unless stated; daily highs and lows were more extreme. "After inflation" deflates by US consumer prices. Past moves describe what happened then; they are not a guide to what will happen next.
Then and now: what rhymes
- Money moves fast between markets: Korea's Kospi fell 6% in a day on 6 November 2026 as investors sold chip stocks across Asia.
- Brazil's central bank stopped cutting rates in November, citing the real's instability after the election.
- A strong dollar and high US rates still put pressure on currencies everywhere, as in 1997.
What's different
Most Asian economies now have floating currencies, large reserves and current account surpluses; Korea's record October exports produced a $42.5bn trade surplus in a single month. The vulnerabilities of 1997, fixed exchange rates and short-term dollar debt, are much smaller. Where they remain, in countries with large dollar borrowing and weak public finances, the 1997 mechanism still applies.
The same mechanism in this year's news
Recent stories where the forces behind this episode are at work again, newest first.
Sources and notes
- Asset moves — FRED: OECD share price indices (SPASTT01USM661N, SPASTT01KRM661N), NASDAQ Composite (NASDAQCOM), 10-year Treasury yield (GS10), WTI oil (WTISPLC), Fed major-currencies dollar index (TWEXBMTH), CPI (CPIAUCNS).
- Asset moves — Gold: US Geological Survey, gold price history (annual averages; the $850 daily high of 21 January 1980).
- Exchange rates: Federal Reserve noon buying rates for the won and baht (DEXKOUS, DEXTHUS), month-end values; rupiah: OECD monthly average (via FRED).
- Events: IMF and standard histories of the crisis. Korea trade figures: Ministry of Trade, Industry and Energy (1 November 2026).
- Figures for 2026: our stories.
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