Asian currencies seen in need of rate policy, not intervention

Asian currencies seen in need of rate policy, not intervention
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First Published: Thu, Jul 03 2008. 10 59 PM IST

Money wasted? In the absence of tighter monetary conditions, currencies will continue to fall, and that in turn will exacerbate inflation by pushing up import prices, say analysts. (Photo: Tomohiro Oh
Money wasted? In the absence of tighter monetary conditions, currencies will continue to fall, and that in turn will exacerbate inflation by pushing up import prices, say analysts. (Photo: Tomohiro Oh
Updated: Thu, Jul 03 2008. 10 59 PM IST
Singapore: Asian central banks have sold billions of dollars recently to prop up their currencies, but such intervention will be money wasted unless policy makers are more aggressive in raising interest rates to fight inflation.
Most Asian currencies, led by the South Korea won and the Indian rupee, have fallen in recent weeks due to concern that central banks are not doing enough to bring prices under control as high fuel and food costs stoke wider inflationary pressures.
Selling of stocks by foreigners has been a big factor.
Money wasted? In the absence of tighter monetary conditions, currencies will continue to fall, and that in turn will exacerbate inflation by pushing up import prices, say analysts. (Photo: Tomohiro Ohsumi/Bloomberg)
Asian authorities are reluctant to tighten monetary conditions at a time when economic growth is faltering.
But analysts say that, in the absence of tighter monetary conditions, currencies will continue to fall, and that in turn will exacerbate inflation by pushing up import prices.
“I think it’s quite difficult for central banks to maintain the value of their currencies while not doing enough on the interest rate front,” said Joseph Tan, a currency strategist at Fortis Bank SA in Singapore.
South Korea, the Philippines, Thailand, India and Indonesia have led the campaign to support their currencies, a reversal of the trend since the Asian financial crisis in the late 1990s, when authorities sold their currencies to hold them down, amassing piles of currency reserves in the process.
The central banks don’t disclose the size of their intervention but this can be estimated by changes in reserves.
Excluding China, foreign exchange reserves in Asia fell by nearly $9 billion (Rs38,187 crore then) in May to $2.54 trillion, following a $10 billion fall in April, official data shows.
That has done little to reassure foreign investors, who sold about $10 billion in stocks in Asia excluding Japan in the four weeks to 29 June, led by the sale of $3.8 billion of South Korean shares, according to Nomura International Plc.
Policy decisions or politics have helped the Chinese yuan, the Singapore dollar and the Taiwan dollar rise against the US dollar this year, but other Asian currencies have either fallen or moved sideways.
The South Korea won has lost almost 10%, followed by a 9% drop in the Indian rupee and a fall of nearly 9% in the Philippine peso.
Central banks in Indonesia, India, the Philippines, Taiwan and Vietnam have raised interest rates this year, but analysts believe Asian authorities need to act much more aggressively to contain inflation expectations and restore credibility.
“We struggle to construct realistic scenarios under which Asian currencies rally. Only a credible and reasonably aggressive policy response to the inflationary impulse washing through the region will do that,” Richard Yetsenga, a currency strategist at HSBC Holdings Plc., said in a note.
Annual inflation rates have reached alarming levels in several countries—26.8% in Vietnam in June, for example, and 11.42% in India. The Philippine central bank expects between 10.4 and 11.2% for June.
A Reuters poll this week forecast that central banks in seven Asian countries, including China, Indonesia, the Philippines, India and Thailand, would raise interest rates this year—or raise them again—to tackle inflation, despite a general slowdown in the region.
Currencies such as the peso, the rupee and the won are particularly vulnerable to high oil prices, which worsen the countries’ trade deficits.
“We remain fundamentally bearish towards currencies that have been most affected by a deteriorating balance of payments landscape, especially if higher oil prices do not see a significant respite in the near term,” Emmanuel Ng, a currency strategist at OCBC Bank, said in a note.
As crude oil hit yet another record high on Thursday above $144 a barrel, the peso fell to 47.65 per dollar on six-month offshore non-deliverable forwards, implying a fall of 5% from the current level.
Few analysts expect Asian currencies to stage a sharp recovery in the near term.
But the Indonesian rupiah has gained about 1% in the past month, outperforming most of its Asian peers, after three interest rate rises by the central bank from early May took the benchmark rate to 8.75%, among the highest in Asia. Investors reversed their short positions on the rupiah in the second half of June, a Reuters poll showed.
Over the longer term, most analysts still expect Asian currencies to resume their rise against the dollar as the region’s economic fundamentals remain relatively sound.
Craig Chan, a currency strategist at Lehman Brothers Holdings Inc., said he expected sentiment on Asian currencies to improve towards the end of the year, basing that on his view that oil prices were likely to ease from current levels.
The renewed weakness in the US dollar against the euro and other major currencies may also bode well for emerging Asian currencies, many of which scored impressive gains against the dollar in 2006 and 2007.
“I don’t think it’s theend of the bull run for Asian currencies,” said Tan at Fortis.
Reuters
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First Published: Thu, Jul 03 2008. 10 59 PM IST