Third, increased exchange rate flexibility has been observed in some of the Asian countries. The US dollar has seen some depreciation while the non-US currencies have appreciated. During 2005 currencies in many developing countries have also appreciated steadily against the US dollar accompanied by some movement towards more flexible exchange rate policies.
Nevertheless, the combination of credit risk and considerable refinancing risk can be toxic, given the popularity of adjustable-rate loans. A negative spiral may arise if there is the slightest doubt about the mortgage banks’ ability to meet their obligations to investors.