POS 485_ASU_ASSIGNMENT 2024_WEEK 1_FOREIGN EXCHANGE RATE DYNAMICS

FOREIGN EXCHANGE RATE DYNAMICS

ARIZONA STATE UNIVERSITY

POS 485 - POLITICAL ECONOMY

WEEK 1

1.1.

GLOBAL RISKS WORLD CURRENCY VOLATILITY:

On February 27, 2020, The Economist Intelligent Unit (EIU) issued a report entitled "Top

five risks to the global economy in 2020".

The first risk is that the US-United States-Iran conflict sparks a surge in global oil prices.

What is happening in the Middle East is actually a struggle for American and Chinese

hegemony on the one hand, the desire to resolve the Saudi Arabia-Iran friction on the other.

The sole hegemony of the United States since the first Gulf crisis in 1990 and the second

Gulf crisis in 2003 continues. Since the Sino-Africano Summit in Sharm-El Sheikh, on the

coast of the Red Sea and Sinai Peninsula, Egypt in 2009, it has been shown that the economic

mecca is no longer solely the European Union and the United States (US), but increasingly

China. Similarly, Arab countries in the Middle East are no longer solely dependent on the US

for their economy, but are also building an economic axis with China. Hegemony is like a

rotating trophy. Britain started it for 150 years, then it was taken over by the US until today.

Japan and Germany tried to take it over in World War II, but failed. US hegemony in the

Middle East is dominant. In Iraq (in Asad-Anbar Province), the American military is still

entrenched. Qatar (in Al Udeid) and the United Arab Emirates have long been the home base

of the American and French military if at any time their neighbors across the sea in the

Persian Gulf, Iran, disturb them. In fact, Dubai was built by Iranian merchants in the past.

Through the Central Asian Regional Economic Cooperation (CAREC), China together with

Central Asian countries carried out regional cooperation to build silk roads in the past that

could connect China to Central Asia to West Asia through the idea of the Chinese Belt Road

Initiative (CBRI) to the Middle East region. Of course, with the development of cooperation

among Asian countries with the sole figure being China, it will threaten US geo-political

hegemony in Asia, the Middle East, which is not impossible to unite with Russia in the north

so as to unite CAREC cooperation in Super Eurasia. In addition, the problem of fellow Saudi

Arabia-Iran is trying to be overcome by fellow Saudi Arabian-Iranian countries themselves,

which according to the plan is trying to facilitate the Saudi-Iranian meeting by the Iraqi Prime

Minister, Adil Abdul Mahdi in Iraq. Of course, the US and Israel do not want a path to Saudi

Arabia-Iran "friendship" to occur because it will undermine its hegemony in the Middle East

including its arms market.

First, the petrodollar and dollar privilege. Both oil and gas are bifurcated into Arabian

Light produced by OPEC and Brent produced by non-Organization of Petroleum Exporting

Countries (OPEC) for crude oil, and Liquified Natural Gaz (LNG) and Liquified Petro Gaz

(LPG) for gas. The price of gas always follows the price of crude oil. Both are traded on

futures. That is, the contract is bought and sold today, the delivery will be 1-3 months in the

future. On this side of the economy, Saudi Arabia as the number 2 oil producer in the world

after Venezuela, certainly does not want to be highly dependent on a single American market.

Therefore, Saudi Arabia exports its crude oil to China as well. It's not that the US doesn't have

crude oil reserves. They have some in Alaska that are reserved for a century to come as well

as oil fields that are being exploited in Texas, Louisiana, and others.

This oil sale and purchase cooperation can be carried out through work channels

Saudi Arabia's Aramco corporation and its Chinese partner either China National Oil

Offshore Company (CNOOC), or Sinopec, or PetroChina. If this cooperation is strong, then

Chevron, Exxon Mobile Oil Company will bite the bullet. Of course, the US Government will

use all means to fulfill their intentions as they did in Kazakhstan, bribing people around

President Nur Sultan Nazarbayev. Moreover, the proximity of Chinese corporations above

also occurs in Venezuela and Petrobraz.

Another economic reason is the hegemony of the dollar. As a privileged currency, the

dollar is valid everywhere. History proves that the US$700 billion spent by Bush Junior in the

pursuit of Osama Ben Laden, the Afghan War, George Walker Bush's Iraq War II, should

have bankrupted the US. The US did not go bankrupt because its government was dominant

owes its own people through the sale of Treasury Bills and the dollar as the world's privileged

currency. The entry of Yuan or Renmimbi in addition to Dinar, Euro, Yen as international

currencies is a new competitor for the dollar. The US will definitely be disturbed. Both

geopolitical hegemony and economic hegemony are what makes President Trump have to

break the chain before the Arab-Iranian 'friendship' road is created so that it can ease tensions

in the Middle East. This is probably the logical reason why the US 'killed' Major General

Qasim Suleimani so that tensions in the Middle East do not subside, and his weapons sell well

just to create a perpetuation of tension away from the impression of the Suni-Shiite

dichotomy.

Second, the trade war between the United States and the European Union. On the US side,

EU countries are not its trading partners. The US focuses its trade more on the North

American Free Trade Agreement (NAFTA) with Canada and Mexico as its neighbors and

three NAFTA members. Another trading partner is China where American agricultural

products are exported. Within the US itself, exporters of agricultural products are alarmed by

Trumponomic. Moreover, the strong ties between US exporters and Chinese importers run

quite strong. Of the 15 major destinations for US exports, five are EU member states

including the UK even though Brexit has not yet been officially enacted. US exports to the

five EU countries reached US$146.7 billion, accounting for 15.3 percent of total US exports.

The US will lose out if its export products are hit by countermeasures in the Trade War

with the European Union. If it continues to market in the five EU countries, it will be more

expensive after being subject to import duties with the same quality of EU production. Of

course, rational consumers will choose cheaper products produced in the EU over imported

products from the US, thus reducing demand for US products. After facing a huge trade

deficit with China, the US will also face an even bigger trade deficit with the EU. In 2018, the

trade deficit with the EU reached US$201.81 billion. However, the EU is more dependent on

US products than the other way around. Of course, the EU's burden will be heavier. In 2018,

exports of 28 EU countries to the US reached €407.06 billion, equivalent to 20.80 percent of

their total exports, ranking first in EU exports. This means that the frequency of trans-north

Atlantic trade is more dominant than trans-mediterranean, and/or EU trade to the eastern

region, although on the US side, the frequency of trans-pacific trade is greater both in terms of

value and volume of trade.

Since October 18, 2019, EU exports to the US have been in effect. The price of EU

products has gradually increased in the US market so that US consumers have shifted their

demand to similar products from domestic and/or low-cost NAFTA member Mexico. If EU

exports fade to the US, as the number one potential market, the impact will be felt by the EU

such as declining production, the threat of layoffs (PHK) which consequently increases

unemployment, adding to the already high unemployment burden as a consequence of labor

market rigidities. The suffering of the EU will affect the global economy. The EU-US Trade

War has disrupted the supply chain of products. If this happens, then exports and investment

fade so that export is an engine of growth and investment as a driver of economic growth will

be sluggish. In addition, we face the economic and health burdens of the spread of the

COVID-19 is causing a recessionary impact in Developing Countries which is exacerbated by

the burden of foreign debt. The prolonged protests in Hong Kong caused an exodus from

Asia's Largest Financial Center. Consequently, exchange rate volatility is increasingly

common which can overturn fundamental macroeconomic indicators.

1.2.

Empirical Findings on Exchange Rate Volatility:

Exchange rate volatility negatively affects a country's trade performance because it

provides exchange rate uncertainty that becomes a reference in international trade

transactions. Empirical findings, Arize et al (2000), Aristotelous (2001), Doganlar (2002),

Chit et al (2008) show that exchange rate volatility has a negative effect on a country's trade

performance negative impact. Historically, economists have argued that the consequences of

exchange rate volatility have been hotly debated over the optimization of various exchange

rate regimes since the collapse of the Bretton Woods system in the 1970s and since then,

exchange rates have become increasingly unstable. On the one hand, economists supporting

the fixed exchange rate regime state that exchange rate volatility actually worsens

international trade. On the other hand, economists supporting the free exchange rate regime

argue that free exchange rates provide an opportunity for a country's currency to find a new

equilibrium. This new balance is created through adjustments in the balance of payments in

response to international turmoil and to suppress increases in import duties, as well as to

control capital movements towards a new macroeconomic equilibrium. According to them,

exchange rate volatility can directly affect a country's international trade through the certainty

of production raw material prices, the adjustment of raw material prices and indirectly affect

the structure of output through investment and government policies.

In addition to exacerbating international trade, exchange rate volatility also affects

domestic price stability. The stability of prices in the form of the inflation rate also depends

on the weakness and strength of financial institutions in a country. Proponents of a fixed

exchange rate regime argue that pegging exchange rates contributes to inflation stability.

Empirical experience shows that in developing countries where financial institutions are

weak, pegged exchange rates become an important instrument in controlling inflation through

exchange rate stability and control of other monetary instruments. In contrast, in countries

where financial institutions are strong, central bank independence exists, financial markets

perform well, inflation targeting becomes an important instrument in price stabilization in

both developed and developing countries.

Exchange rate volatility also affects foreign capital flows and economic growth. Studies by

Bénnasy-Quéré (2001), Morrisey and Manop (2008) show that the depreciation of the

currencies of Southeast Asian FDI destination countries against the United States Dollar

(USD) will spur capital inflow into developing FDI destination countries. However, this does

not apply to The volatility of East Asian regional currencies against the Yen weakens FDI

flows from OECD countries to East Asian countries. However, these instruments are not the

only factors attracting foreign direct investment as cheap production and flexibility of the TK

market, number of telephone lines, economic growth, export to GDP ratio, gross value added

of the manufacturing sector, inflation rate, portfolio investment, infrastructure, investment

climate are also determinants of FDI inflows.

Exchange rate volatility also affects economic growth. Economists such as Schanbl (2007)

found that exchange rate stability has a positive effect on economic growth, especially if the

country concerned applies flexible exchange rates. Various empirical findings show that the

fluctuation of the rupiah goes hand in hand with the increasing integration of the Indonesian

economy in the world economic order. Since the 1997 Asian crisis, exchange rate volatility

has increasingly dominated the regional economy, which in turn has become one of the causes

of the economic crisis. What is noteworthy is that so far this economic crisis has

predominantly occurred in the region such as the Latin American crisis in 1994, the 1997

Asian crisis and the Eurozone crisis since 2010. Due to the frequent occurrence of regional

crises, economic cooperation such as the early warning system (EWS) developed by the Asian

Development Bank (ADB) must become a tradition. Even today, the regional economic

downturn is still felt as a consequence of the world economic downturn, especially China.

In 2001, Jeffrey A. Frankel declared 'no single currency'.

regime is right for all countries at all times'. There is no single exchange rate regime that is

right for all countries at all times. Since the collapse of the Bretton Woods system in 1970 the

exchange rate regime has shifted from a stable regime to a regime of exchange rate volatility.

The exchange rate has fluctuated even more as the world economy has been integrated into a

highly open financial system. The world financial architecture has changed. Countries whose

financial architecture still rely on banking institutions as the only source of finance will be

increasingly fragile compared to countries that rely on various sources of finance such as the

market bonds, debt securities market, stock market as well as long-term foreign capital flows.

Exchange rate volatility or fluctuating exchange rates of a country's currency

The rapid growth of macroeconomic indicators does not only affect one country's

macroeconomic indicators, but affects all macroeconomic indicators to the point of disrupting

the economic stabilization process of various countries in the world.

1.3.

Anticipate Increased Volatility in Rupiah Exchange Rate:

Krugman, Obstfeld, Melitz (2014) pointed out that there are two factors affecting the

current account, namely the real exchange rate and per capita income in the importing

country. Almost two decades after the monetary crisis in Asia, Asian countries shifted from a

fixed exchange rate system to a flexible exchange rate. However, a controlled floating

exchange rate is always associated with the US dollar, requiring costly interventions that

deplete foreign exchange reserves, resulting in a current account deficit, causing a decline in

foreign confidence in Indonesia's ability to pay. The traumatic Asian crisis encouraged East

Asian countries to conduct monetary cooperation in Asia. This cooperation took the form of

research and crisis anticipation, collective application of currencies pegged to the US dollar or

Yen or the use of a basket of major currencies.

In the aftermath of the Asian crisis, economists advocated a two-pronged solution where a

fixed exchange rate system, perfect capital mobility and independent management of financial

policy could be achieved simultaneously. The aim of this solution states that a fixed exchange

rate system is the only monetary system that can be sustainable in an environment where

capital mobility is perfect and free floating or pegged exchange rates such as the Currency

Board System (CBS) or dollarization are suitable in East Asia. Exchange rate systems that are

midway between fixed and free exchange rates are highly vulnerable to monetary and banking

crises. In the process of searching for an appropriate alternative monetary system in Asia,

especially from a stability perspective, the interest in the Asian Monetary Union (AMU) is

also an appropriate solution. The launch of the union The European economic and monetary

model is seen by Asian countries as an unrealistic proposal although Asian leaders are

interested in the same idea. However, fluctuations in regional currencies, especially against

the USD, are very disruptive to the economic targets and short-term performance of the

economies of East Asian countries, especially Indonesia in the form of exchange rate

fluctuations or exchange rate fluctuations cannot be separated from Indonesia's policy choices

in the international monetary field.

The consequences of Indonesia's choice of a floating exchange rate regime have been

predictable. So it is natural that this condition will continue, this is what is referred to as

macroeconomic vulnerability when Indonesia chooses to impose a floating exchange rate

regime. This is not to say that the choice of a fixed exchange rate regime is without

consequences.

The phenomenon of exchange rate volatility is actually a common thing in the global

financial market. Theoretically, first, the fluctuation of the rupiah exchange rate is inseparable

from Indonesia's choice in the implementation of the exchange rate system in the impossible

trinity or Mundell triangle. According to Mundell's concept, Indonesia cannot achieve three

monetary policy objectives at once, namely monetary policy independence, exchange rate

stability, and world financial market integration. Monetary policy independence and exchange

rate stability rely on capital flow control, exchange rate stability and world financial market

integration rely on monetary union, while financial market integration and monetary policy

independence rely on a floating exchange rate system. Like several other Asian countries

namely South Korea, the Philippines, Thailand, Indonesia until recently preferred integration

in the global economy and monetary policy independence. The choice of exchange rate

regime is free exchange rate. Of course, it gives up the choice between exchange rate stability

and integration in the global economy and the choice between exchange rate stability and

monetary policy independence. Consequently, exchange rate stability was left to the market

mechanism, resulting in the current conditions that have persisted since the recovery after the

1997 Asian crisis.

Second, exchange rate fluctuations or precisely volatile exchange rates such as when This

is also a consequence of the heavy capital inflows into Indonesia as a consequence of

Indonesia's economic integration in the world economy Global. It's just different from during

the Asian crisis. During the Asian crisis, capital inflows in the form of financial investment

were short-term or hot money which at any time left for other countries and caused a sudden

stop. Currently, capital inflows are dominated by FDI, especially in the infrastructure sector.

However, the trade war between the United States and China, the Trade War between the

United States and the European Union, geopolitical risks especially in the Middle East,

economic instability in Latin America encourage sluggishness and uncertainty in the global

economy including global financial market uncertainty remains high. Capital inflows after

peaking in 2015 and then declining began to increase again in 2017 until now. The volatility

of capital inflows drives the volatility of the rupiah exchange rate. Since 2014, the difference

between interest rates and on-the-spot exchange rate changes has widened between 4-10

percent. Consequently, investment risks are higher in emerging market countries which

undermines Indonesia's triple B positive outlook credit rating, a performance that was

achieved twenty years ago.

Currently, there is an economic slowdown along with The fluctuating exchange rate of the

rupiah against the US dollar even reached its lowest point since the 1997 Asian crisis. This

phenomenon has led to fears of capital outflows that could plunge Indonesia into crisis. This

concern is exaggerated because this phenomenon also occurs in other countries. The

strengthening of the US dollar is not only against the rupiah, but against almost all global

currencies. For example, in the January-October 2015 period, there were capital outflows of

US$1.3 billion, but in the sovereign bond market net purchases reached US$5 billion,

meaning that capital inflows were greater than capital outflows and investors in the bond

market invested in the long term. On the other hand, the government managed to reduce the

debt ratio from 100 percent of GDP in 2000 to just 25 percent in 2015 and then rose to a level

of around 28 percent in 2018 to date. The current account deficit in 2015 reached 3 percent

which could be reduced through foreign direct investment (FDI) of 2 percent of GDP. As of

September 2015, FDI has reached US$21.3 billion which is estimated to be by the end of this

year will reach US$28.0 billion. This high level of FDI will be the right solution for reducing

the current account deficit because it is long-term. Unintentionally, 40 percent of this FDI is

invested in the services and tertiary sectors, including infrastructure, along with the large

allocation of infrastructure funds in the 2015 Revised State Budget (APBNP), which reached

Rp600 trillion and until now, labor-intensive infrastructure remains a development priority.

This increase in FDI continued until 2018. In the fourth quarter of 2019, investment

realization reached Rp208.3 trillion while investment realization in the January-December

2019 period reached Rp809.6 trillion or 102.2 percent of the target. The strategy of resolving

stalled investment issues in Indonesia is one of the promotional strategies to attract investors.

Currently, the Investment Coordinating Board (BKPM) has resolved the issues of 9 out of 21

stalled investment projects in 2019. The project is valued at IDR 708.- trillion because it is

hampered by technical problems. From the domestic side, the dominance of financial turnover

in the infrastructure sector does not have an inflationary impact in the country.

1.4.

Rupiah Volatility during the Covid-19 Pandemic:

Macroeconomics teaches us that the art of economic life is full of imbalances, volatility,

uncertainty, ambiguity and complexity. The fluctuation of a country's currency is only a

temporary condition that occurs incidentally due to economic and non-economic turmoil. The

turmoil can take the form of the Fed's interest rate dilemma, the United States-China Trade

War, the Saudi Arabian and Russian oil wars, the United States-Iran Conflict, piracy in the

Gulf of Aden, the incident at the Aramco oil well, and COVID-19.

Until 2020, the global economy is indeed entering a sluggish phase as a consequence of the

above events. This downturn will have a significant impact if experienced by countries that

hold the control of economic power such as the United States, China, Japan, the European

Union, South Korea, Taiwan, Singapore, Hong Kong. Similarly, the current fluctuation of the

rupiah currency occurs due to snow ball effect of COVID-19. China as the number two

economy in the world behind the United States is greatly affected both domestically and to its

trading partners. In Asian continent countries including ASEAN, COVID-19 has a wide

impact. The reason is that trade relations between China's neighboring countries are very

close, characterized by high trade intensity. Vietnam, Laos, Myanmar, Cambodia are

suppliers of raw materials for China's manufacturing industry. Trade between Indonesia and

China is very intense. China is the main destination of Indonesia's exports compared to other

countries, similarly, Indonesia's imports are dominantly from China.

In February 2020, Indonesia's exports reached US$13.94 billion or 2.24 percent compared

to January 2020. Of this amount, US$13.12 billion was non-oil and gas exports or an increase

of 2.38 percent compared to January 2020. Cumulatively, during the January-February 2020

period, Indonesia's exports reached US$27.57 billion. What should be encouraging is that the

destination of Indonesia's non-oil and gas exports is diversified, namely to China amounting

to US $ 1.87 billion, the United States $ 1.63 billion, Japan reached US $ 1.14 billion, whose

proportion as a whole in the three main destination countries for Indonesian exports reached

35.32 percent. Meanwhile, our exports to the European Union (27 countries) reached US$1.1

billion.

In contrast, in February 2020, Indonesia's imports reached US$ 11.60 billion, a decrease of

18.79 percent compared to January 2020. Of this amount, both oil and gas imports and non-oil

and gas imports decreased from January 2020 by 12.05 percent and 19.77 percent

respectively. Oil and gas imports reached US$1.75 billion and non-oil and gas imports

reached US$9.85 billion. As with exports, there are three countries that supply imported

goods to Indonesia, namely China, Japan, Singapore. During the January-February 2020

period, China ranked first as a supplier of goods to Indonesia with a value of US$5.92 billion

or a proportion of 26.76 percent. Japan is in second place as an importer of Indonesia with

US$2.38 billion or reaching 10.77 percent, and imports from Singapore rank third reaching

US$1.48 billion or a proportion of 6.67 percent. Non-oil and gas imports from ASEAN

reached US$4,713.2 million or a proportion of 21.29 percent, while imports from ASEAN

reached US$1.48 billion or a proportion of 6.67 percent from the European Union reached

US$1,965.0 million or a proportion of 8.88 percent.

About 75.22 percent of the imports were raw and auxiliary materials, 15.70 percent were

capital goods and 9.08 percent were consumer goods. The high content of imports of raw and

auxiliary materials is a minus factor for Indonesia's trade performance because these imports

are inputs for the manufacturing industry for export purposes. These raw material imports put

pressure on the Indonesian economy as they deplete foreign exchange reserves outside of gold

reserves, giving negative sentiment to the performance of Indonesia's foreign trade side. As a

result, the frequency of the rupiah to volatilize is accelerating.

The volatility of the rupiah exchange rate began to move on. Until the first day of the last

week of March, the rupiah fluctuated. In the afternoon session on Monday, March 30, 2020, it

was at the level of Rp16,338 per US$1, a weakening of 1.04 percent compared to the Friday,

March 27, 2020 session of Rp16,170 per US$1 in the transaction range of Rp16,155-

Rp16,415. Conversely, in the Friday, March 27, 2020 session, the rupiah strengthened by 0.83

percent compared to the previous day at Rp16,305 per US$1. The peak of rupiah depreciation

occurred on March 23, 2020, when the rupiah depreciated by 3.85 percent compared to the

last day of the previous week at the level of Rp15,960 per US$1, in the transaction range of

Rp15,975- Rp16,625. Meanwhile, the JCI on March 23, 2020 closed at 3,989.52 or weakened

4.90 percent against the previous day's closing of 4,194.94. The majority of stock exchanges

and currencies of major countries in Asia closed down along with the decline in US Wall

Street stocks as a consequence of COVID-19. This stock and currency price shock was

exacerbated by the 47-47 vote on the economic stimulus bill proposed by Republican senator

Mitch McConell amounting to US$2.- trillion to overcome COVID-19. In the second week of

April, the rupiah exchange rate gradually strengthened from Rp16,413 on April 6, 2020 to

Rp16,200 on Tuesday, then closed stronger on Thursday, April 9 to Rp15,880. The

strengthening of the rupiah was driven by positive global sentiment such as President Trump's

desire to rebuild the American economy as his second priority after handling the COVID-19

pandemic COVID-19. In addition, Russia's desire to cut oil production by 1.6 million barrels

per day or 15 percent of its production.

Domestically, the strengthening of the Jakarta Composite Index (JCI) and the rupiah are

positive signals that Bank Indonesia's intervention is working. Exchange rate volatility

indicates that all countries in the world face economic vulnerability as a consequence of the

increasing integration of a country's economy in the global economy. Economic integration is

characterized by trade integration and financial integration. The more integrated a country is

in the global economy, the faster the country adjusts to economic and non-economic turmoil,

however, on the other hand we do not ignore that the country is increasingly challenged in

anticipating exchange rate volatility.

Exchange rate volatility is not only faced by the rupiah, but by regional currencies,

including regional Asia and other parts of the world. This volatility will only last for a

moment as a consequence of the accumulation of the US-China Trade War, US-EU Trade

War, Saudi Arabia-Russia Oil War, and COVID-19. This phenomenon is a logical

consequence for Indonesia in implementing the choice of Mundell's impossible trinity

principle. This principle states that a country can only choose two of three policy options and

cannot simultaneously achieve three monetary policy goals, namely monetary policy

independence, exchange rate stability, and integration in world financial markets. The first

and second goals are based on capital flow control, the second and third goals are based on a

monetary union system, and the third and first systems are based on a free floating system.

Since Indonesia, South Korea, the Philippines, and Thailand share the same goals of monetary

policy independence and integration in the global economy, they have allowed their

currencies to volatilize towards a new equilibrium point. In the end, Jeffrey Frankel's (2000)

statement, "No Single Currency Regime is Right for All Countries or at All Times" is true.

Krugman, Obstfeld, Melitz (2014) point out that there are two types of factors affecting the

current account, namely the real exchange rate and income per capita in the importing

country. Almost two decades after the Asian financial crisis, Asian countries shifted from a

fixed exchange rate system to a flexible exchange rate. However, a controlled floating

exchange rate always associated with the US dollar required costly interventions that depleted

foreign exchange reserves resulting in a current account deficit, which led to a decline in

foreign confidence in Indonesia's ability to pay. The traumatic Asian crisis encouraged East

Asian countries to conduct monetary cooperation in Asia. This cooperation took the form of

research and crisis anticipation, collective application of currencies pegged to the US dollar or

Yen or the use of a basket of major currencies.

1.5.

Rupiah Exchange Rate Volatility: Government Policy Strategies in the Face of Dollar

Appreciation:

Nearly two decades after the financial crisis in Asia, Asian countries moving away from a

fixed exchange rate system towards a flexible exchange rate. However, a controlled floating

exchange rate is always associated with the US dollar requiring costly interventions that

deplete foreign exchange reserves resulting in a current account deficit, leading to declining

foreign confidence in Indonesia's ability to pay. The traumatic Asian crisis encouraged East

Asian countries to conduct monetary cooperation in Asia. This cooperation took the form of

crisis research and anticipation, collective application of currencies pegged to the US dollar or