But this pattern reversed sharply with the onset of the Asian financial crisis in the second half of 1997, and again following the ruble’s devaluation in August of 1998. These changes in foreign investor’s willingness to hold claims on emerging market economies had a particularly severe impact on currencies operating under fixed or pegged exchange rate regimes.
Accordingly, those countries foreign exchange reserves, and reserve policy, played an important role in the recent financial crises. In both Thailand and Korea the monetary authorities allowed their foreign exchange reserves, net of forward contracts and other obligations, to fall almost to zero. Once this became obvious to market participants, subsequent downward pressure on the baht and the won intensified substantially.