Singapore: Beware the rally in emerging market currencies: the best quarterly performance in almost seven years is about to reverse.

That’s the message from the most-accurate forecaster of developing-nation Asian currencies last quarter: Wells Fargo & Co.

“We don’t see continued appreciation through the rest of the year," said Nicholas Bennenbroek, head of currency strategy at the US bank in New York. “Federal Reserve interest-rate increases should continue at a steady pace, which should weigh on most foreign currencies, including Asian currencies."

South Korea’s won, Indonesia’s rupiah and Thailand’s baht will all decline more than 2% in the next nine months, according to Wells Fargo forecasts.

The rupee and the peso will also weaken, but will be more resilient due to the hawkishness of the Indian and Philippine central banks, said Bennenbroek.

The Bloomberg-JPMorgan Asia Dollar Index, which tracks 10 regional currencies excluding the yen, rose 2.5% in the three months to March, the most since the quarter through September 2010.

Bennenbroek shared his views in an email interview last week:

Why the negativity on Asian currencies?

“Among the contributing factors to the solid performance of Asian currencies during the first quarter was the strength of global equity markets, and periods of corrective US dollar weakness following rate hikes in December and March." “We don’t expect the pace of equity-market gains will match their recent rapid pace, and indeed there may be periods of weakness." “A less favourable global equity market environment will also remove a source of support for Asian currencies."

Why will the rupee and peso outperform?

“Most Asian currencies should decline versus the greenback, although there should be winners and losers." The rupee will be relatively resilient due to India’s solid economy and a reasonably prudent and neutral monetary policy that is “leaning hawkish rather than dovish," and sound external accounts. Strong economic growth and the possibility of rate hikes are supportive factors for the peso. The peso will drop 1.2% to 50.25 per dollar over the next nine months, while the rupee will decline 1.3% to 65.50, Wells Fargo forecasts.

Apart from the Fed, what are the other risks?

The won will weaken due to subdued economic growth, an on-hold central bank and some softening in Korea’s external accounts that has made the currency more sensitive to global events. The main risks that Asian currencies will underperform Wells Fargo forecasts are financial-market instability or economic disappointment in China, or challenging trade negotiations and relationships with the US, he said.

That would be particularly negative for the yuan and the won. There are also geopolitical risks related to North Korea, which would probably impact South Korea the most. Bloomberg