Despite the uncertainties and the fear of another round of the financial crisis that occurred in 1997 in Asia, the emerging markets of Asia have emerged relatively well from the recent sub-prime global financial crisis. By the third and fourth quarter of 2009, the Asian economies in general, reported positive trade balances and net current account balances. Signs that rapid economic recovery is on course can also be traced from their GDP growth rates. Moreover, the return of a continual inflow of portfolio capital starting in late 2009 confirmed the renewal of market confidence in the near term outlook of these Asian economies. Unprecedented fiscal and monetary policy stimulus packages in 2008 and early 2009 have contributed significantly to their rapid recoveries (Tables 1 and 2). The ability of the policy makers to maintain financial stability and prevent a severe credit crunch from taking place, has also given a major boost to their overall economic performances (Siregar and Lim (2010)).

Among many aspects of a financial crisis, the sudden rise in exchange rate volatility has always been a major source of concern for policy makers. For instance, during the 1997 Asian financial crisis, the large swings that involved severe depreciations of the local currencies exacerbated the fundamental weaknesses of the affected economies. The weak currencies forced many financial institutions and their clients into debilitating insolvencies (Lane (1999)). In tandem with the credit crunch, particularly sharp falls in trade credits, volatile local currencies were responsible for the collapse of the trade and other sectors of the economies in several major East and Southeast Asian economies such as Korea, Indonesia and Thailand during the 1997 crisis.