Asian banks may let currencies rise in bid to contain inflation

Asian banks may let currencies rise in bid to contain inflation

New York/Hong Kong: Selling the dollar against a basket of currencies from Malaysia, Singapore and Taiwan is the top trade in 2008, as Asian central banks allow faster currency appreciation to offset price pressures, according to a Goldman Sachs Group Inc. ­analyst.

The Asian currencies will also gain as it becomes costlier for the central banks to enter foreign exchange markets, said Jens Nordvig, a senior currency strategist in New York at Goldman Sachs—the world’s most profitable securities company.

“We are bullish on the Asian currencies," Nordvig said. “The central banks need to allow faster gains for the currencies to curb inflation. With US interest rates going lower, it becomes costly for them to" sell local currencies and hold dollar assets. The Malaysian, Singaporean and Taiwanese currencies will each gain about 5-10% against the dollar in the next year, according to Nordvig.

The Malaysian ringgit, which was trading at 3.368 (Rs39.71) per dollar on Thursday in London, has gained 4.7% this year against the dollar. The Singapore dollar rose 5.9% and the Taiwan dollar advanced 0.9% over the same period.

The Singapore dollar traded at $1.4492 per dollar and the Taiwan currency traded at $32.300 per dollar.

The dollar has dropped to its lowest since 1971 this month against a basket of currencies, as the Fed’s 0.75 percentage point in rate cuts since September prompted investors to seek higher returns elsewhere.

Singapore’s inflation accelerated in October to 3.6% from a year earlier—the highest since 1991, a report showed on 23 November. The consumer price index in Malaysia rose 1.9% from a year earlier, after gaining 1.8% in September, a seperate report revealed on 21 ­November.

Goldman Sachs also recommended that investors sell the pound against the yen next year as UK growth slows, pushing the Bank of England to cut its benchmark interest rate from 5.75%. The bank also advised buying a basket of Brazil’s real, Russia’s ruble and the Czech koruna against a basket of the US dollar, the Canadian dollar and the British pound.

Investors should also hold short positions for gold on expectations that current concerns about credit market losses tied to US subprime mortgages will subside, Goldman Sachs said.

A short position is a bet that an asset price will decline in the future.

In related development, analysts said gold may decline 15% to 20% next year, Goldman Sachs’ chief economist, Jim O’Neill said over the phone from London on Thursday.

O’Neill said his economics group made its forecast as part of an annual review of top investments.