Market participants who may have been indifferent to deficiencies in the financial infrastructure at the old exchange rate start to voice disapproval of it once the exchange rate has fallen. But nothing may have changed with respect to financial infrastructure: the only new information on which the change in judgment could be based is the lower exchange rate itself.
This could become self-reinforcing and lead to further capital outflow and a yet lower exchange rate. There has been a tendency for this to occur over the past 12 months. For this reason, and others, we have seen exchange rates in some Asian countries that have fallen to half of their level a year ago or, in Indonesia’s case, a quarter.