Vol. 5 Num 418 Sat. July 30, 2005  

Asian currencies to rise by mid 2006

Asian currencies will rise against the dollar in the next 12 months, underpinned by strong growth and speculation China's yuan will rise further after last week's revaluation, a Reuters quarterly poll showed.

Yet, their gains will be modest and thwarted by the region's deteriorating trade balances, interventionist central banks, and rising interest rates in the United States, analysts said.

"The medium term dollar-Asia direction is clearly to the downside," said Bhanu Baweja, a currency strategist with UBS in Singapore.

"Apart from the fact that many Asian currencies are undervalued and should see strong speculative inflows, possibly also into equities, we note that the market continues to expect dollar-yuan to shift lower," he said.

But Asian central banks would intervene to curb the strength of their currencies as their capacity to buy dollars and build reserves had not diminished, Baweja said. Asian reserves now total $2.6 trillion.

"The call for Asian currencies therefore remains one of modest appreciation," Baweja said.

The Reuters regional polls showed the Singapore dollar rising 2.7 per cent over the next 12 months from current levels around 1.6640.

The Thai baht was expected to rise three percent by June 2006, the Korean won and Indian rupee just over a percent and the Taiwan dollar 2.75 per cent.

Even the Indonesian rupiah, which has been a regional laggard this year as the country imports huge amounts of expensive dollar-denominated oil, was seen recovering 3.5 percent to 9,500 by the end of 2005.

The Malaysian ringgit, which was unshackled from its peg of 3.8 per dollar last Thursday in favour of a managed float, was seen gaining more than the others.

Analysts forecast it will rise 4.1 percent in a year from Thursday's spot rate of 3.75 per dollar.

China raised the yuan's value by 2.1 percent to 8.11 a dollar last Thursday, and said it would now manage the yuan against a basket of currencies. This week, Chinese authorities have told markets not to expect further adjustments in the short term.

Even if the yuan does not gain rapidly, analysts said, the expectation of a steady rise in the yuan would prop up other Asian assets.

Korea, Singapore, Hong Kong and Taiwan have been prime beneficiaries of the huge speculative rush of money into Asian assets in the last three years, betting on a yuan revaluation.