The third-quarter storm (The currency crisis and meltdown in financial markets)

A devaluation — or the removal of the peg — was inevitable and would mean a windfall of profit to be long on dollars, traders say. As the peg meant the central bank would have to put up a costly defense of the currency every time, it was then just a matter of time before central banks decided to abandon it.

“What is speculation for one person is an investment for another,” Hongkong and Shanghai Banking Corp. ( HSBC) treasurer Mark Boyne said.

The sensitivity of the local financial markets to adverse developments in Thailand was exacerbated by the resignation of former Thai finance minister Amnuay Viravan in mid-June. It turned out to be one of the final straws that made the baht’s devaluation a selffulfilling prophecy.

On July 2, the soup had come to a boil in Thailand, with the baht losing 15% to 20% of its value against the US greenback.

It wasn’t long before speculators trained their sights on the Philippine peso which, analysts say, was clearly experiencing a so-called “trial by affinity.”

Volume turnover at the Philippine Dealing System (PDS), the country’s electronic currencies exchange, breached the billion-dollar mark as foreign fund managers queued to pull out from the Philippines.

Within the next few days, local monetary authorities mulled abandoning their stubborn defense of the peso which has been almost glued to the P26:$1 level for over two years now.

Although monetary authorities insisted their exchange rate policy was “purely market determined,” economists criticized the Bangko Sentral for keeping the peso “artificially” locked in a tight band, even describing the peso’s stability against the dollar as a “dead man’s heartbeat.”

Nine days after the baht’s devaluation, the Bangko Sentral had spent $1.5 billion in defense of the peso. Pushed to the wall, the central bank announced it was abandoning its defense of the peso and allowing it to trade at a wider band on July 11.

Its present level represents a 20% depreciation against the dollar.

During the third quarter, currency speculation was clearly the name of the game.

“Everybody can be a speculator... from banks to exporters to individuals who would rather hold on to their dollars, hoping that it would gain value on a given day,” HSBC’s Mr. Boyne said.

It also did not help that commercial demand for dollars was at its heaviest in the third quarter as importers build up their inventory for the holidays.