FRM Financial Risk Manager Practice Test

The event that fueled the Asian Financial crisis in 1997 was the Thai government’s decision to float its currency, the Baht, cutting its peg against the U.S. dollar. This led to the financial collapse of the Baht, a confidence crisis in the currency, and the collapse of the financial market in the country. As the crisis spread, most of Southeast Asia and Japan saw slumping currencies, devalued stock markets and other asset prices, and a precipitous rise in private debt.

Key Takeaway: Pegging the Thai baht against a strong currency like the U.S dollar gave stability to the currency. Discontinuing the peg led to macroeconomic instability, affecting investments of all types across Asia.