In addition to the factors above, the exchange rate regime adopted by most of the afflicted countries was seen by some as having played a crucial role in the emergence of the crisis in East Asia. Many countries in the region appear to have had currencies which were either firmly pegged to or heavily managed within a narrow band against the US dollar. It has been suggested that the reason for this could be because, despite the fact that trade with Japan, Asia and Europe was significant, a large proportion of trading was conducted and denominated in US dollars. Estimates show that the implicit US dollar weights in a composite basket of East Asian effective exchange rates were extremely high (see table below).

Table 5: Implicit weights of US dollar and Japanese yen in nominal values of selected Asian currencies
	Estimate A1		Estimate B2
Currency	US dollar	Japanese yen	US dollar	Japanese yen
South Korean won	0.96	-0.01	0.84	0.17
Singaporean dollar	0.75	0.13	0.75	0.18
Malaysian ringgit	0.78	0.07	0.87	0.16
Indonesian rupiah	0.95	0.16	0.97	0.01
Philippine peso	1.07	-0.01	1.07	0.03
Thai baht	0.91	0.05	0.86	0.09
Source: Reproduced from the World Economic Outlook, International Monetary Fund, October 1997, page 82. Original source: "The Yen and Its East Asian Neighbors, 1980-95; Co-operation or Competition?" by Shinji Takagi, National Bureau of Economic Research working paper no. 5720, August 1996. 1 Estimate A from "Yen Bloc or Dollar bloc?: Exchange Rate Policies of East Asian Economies" by Jeffrey A. Frankel and Shang-Jin Wei, in Macroeconomic Linkage: Savings, Exchange Rates, and Capital Flows, ed. by Takastoshi Ito and Anne Krueger, University of Chicago Press, 1994. 2 Estimate B from "Enken no Keizaigaku" ("The Economics of the Yen Bloc") by C.H. Kwan, Nihon Keizai Shiunbunsha, 1995.

A depreciation in the US dollar against major currencies in the first half of the 1990s-due to the United States' policy of a weak dollar to reverse the cyclical slowdown in the US economy-resulted in the depreciation of the real exchange rate of many East Asian economies and hence an increase in competitiveness against other emerging markets. However, the situation started to reverse itself in 1995 when the United States stock market began to embark on its journey upwards and the strengthening of the United States' economy heightened expectations of domestic interest rate increases. This strengthened the US dollar and, with burgeoning inflationary pressures in East Asia, meant that the economies in the region experienced very significant real effective exchange rate appreciation (see charts below).

Figure 10: Evolution of real exchange rates pre- and post crisis
ASEAN-4 economies	Indonesia
Sources for all charts: Datastream/ICV and Securities Commission, Malaysia
Northeast Asian economies
Sources for all charts: Datastream/ICV and Securities Commission, Malaysia

While the extent of the causal link is ultimately an empirical question, the loss of competitiveness arising from the real exchange rate appreciation was also accompanied by a decline in the global demand for key Asian exports such as semiconductors and electronics. The situation was further exacerbated by dampened demand from a sluggish recovery in the Japanese economy-a destination for a significant portion of the region's exports. Finally, increasing competition from low-cost countries meant that East Asian countries experienced not only declining export volume but also export prices.²³