Korea refused to cut rates recently, but the won has continued to slide. On the other hand, Taiwan cut interest rates before the Fed's first rate cut on January 3, but the New Taiwan dollar has risen since then. The Fed also cut rates twice in January, but the US dollar has not weakened. Similar situations are also occuring in some Latin America and Eastern European centres. These unconventional currency moves suggest that the dynamics between monetary policy and currency markets has changed.
Growth is tough to come by under deflation.
Hence, any policy that promotes growth and facilitates economic reform will attract investment inflow and benefit the currency of the corresponding country. In a dis-inflationary environment, real economic variables, such as earnings and real interest rates, determine exchange rates and asset markets, because the price extraction problem stemming from rising inflation that distorts investment decision is kept to a minimum. The badly needed structural reforms are a dynamic process to piece together economic and asset market growth and capital flows to restore investor confidence in Asia. The Fed's rate cuts alone may be less effective in Asia's excess supply environment, but the resultant global reflation does improve the macro backdrop for economic retrenchment. It is up to Asia to grasp the opportunity to reinvent itself.