Inflation rates in Asian countries rose due to overheated economic activity, and under their fixed exchange rate system, their currencies became overvalued. Consequently, the international competitiveness of these economies declined gradually and current account deficits expanded. The deficits in the current accounts were not a problem as long as they were financed by foreign capital.
Of particular difficulty to members of the EEC, under some circumstances the exchange rate bands specified in the Smithsonian agreement permitted movements of up to 9 percent between any pair of currencies.