‘Worst likely over’ for Asian currencies

The worst may be over for emerging Asian currencies as slowerthan-expected US inflation eases pressure on the Federal Reserve to aggressively raise interest rates, according to DBS Group and Maybank.

Currencies across the region jumped last week, following their developing-nation peers, after lower US inflation figures led to a slump in the dollar. The Thai baht led gains, rising 0.9%, while the Indonesian rupiah strengthened 0.7%.

“The US inflation data affirmed our assumption for the dollar to return gains against Asian currencies starting this quarter into the rest of the year,” said Philip Wee, a senior foreign-exchange strategist at DBS in Singapore. “The worst is likely over for Asian currencies, though volatility will persist.”

A weaker dollar will ease pressure on Asian central banks to raise rates and help support economic growth amid the risk of a recession in some developed nations.

Optimism toward emerging Asian assets has already been building in recent months as shown by fund inflows. This month alone, global investors have bought a net $2.06 billion of Indian stocks and $1.25 billion of Korean equities, along with $1.71 billion of Korean bonds and $721 million of Indonesian debt.

JPMorgan Asset Management shifted to an overweight position on Indonesian bonds this month, saying any selloff would be a good opportunity to buy duration.

Annual US consumer-price gains slowed to 8.5% in July from a 9.1% June advance that was the largest in four decades, the Labor Department said last Wednesday.

“Our baseline has always been for US inflation to grind lower over time, and for growth jitters to become more apparent into year-end,” said Yanxi Tan, a currency strategist at Maybank in Singapore. “That would support some retracement of the dollar’s strength against Asian FX in the second half of the year.”

Still, there are those who remain bearish on Asian currencies, saying last week’s better-than-forecast payroll figures are a reason for the Fed to keep raising interest rates.

“We don’t think one CPI report is enough to change the Fed rhetoric,” said Trang Thuy Le, an Asia foreign-exchange strategist at Macquarie Capital in Hong Kong.

Emerging Asia currencies are still nursing heavy losses this year. The Korean won has dropped 8.7%, the Philippine peso has fallen 8.1% and the Taiwan dollar has lost 7.6%.