Asia facing tough battle against currency strength
By Jennifer Hughes
Published: January 16 2004 4:00 | Last Updated: January 16 2004 4:00
Seoul's announcement yesterday of measures to curb speculative dealing in the won is the latest example of Asia's determination to resist the pressure for stronger currencies. But rising flows of foreign investment into the region's equity markets highlight the task the central banks face.
South Korea has now restricted the dollar amount overseas investors can sell to domestic players via the non-deliverable forwards market. The move is designed to head off the sort of speculative activity that led to the currency crises of 1997 and 1998 by curbing the bets foreigners can place on currency direction.
The won weakened on the news but stayed near recent highs due to strong investor interest in the region.
According to UBS, foreigners poured more than $2.8bn into the region in the first full trading week of 2004 - a record weekly flow and far higher than the average $520m the bank saw each week in 2003.
Overseas investors are buying Asian equities to take advantage of the region's relative cheapness and its exposure to a recovering global economy.
But Korea intervened heavily last year to stem currency strength and - judging by yesterday's announcement - it intends to continue fighting.
It is not alone. Japan spent Y20,000bn on intervention last year and is planning to raise the ceiling sharply on the amount it can spend this year. Thailand last year announced similar measures to Korea's, and this week warned it would intervene if the baht continued to strengthen.
But market speculation that this is the year Asian currencies will revalue is still widespread. Rumours of a change in China's strict currency peg - the lynchpin of the region's currencies - have spread. Malaysia's prime minister was this week forced to deny the government had any plans to revalue its ringgit peg, in place since 1998.
Speculative pressure on China's renminbi last week indicated investors were pricing in a 6 per cent appreciation in 2004.
Hong Kong's dollar peg was designed to prevent weakness, not strength, and the monetary authority has spent HK$51.25bn (US$6.7bn) since September limiting the currency's appreciation. Investor interest in Hong Kong has, ironically, been boosted by the peg, which means dollar weakness makes its assets look cheap in comparison to non-pegged currencies such as the yen.
Asia's central banks have been buying unprecedented amounts of US Treasury bonds in an effort to counter the flows of funds into their economies, but strategists believe this is not enough.
"This is only part of the equation and seems only capable of offsetting the heavy speculative positions that are shorting the US dollar," said Claudio Piron at Standard Chartered. "As a result, the real money flows that are focused on long-term portfolio positions appear to be having an increasing influence on the currency markets."
South Korea's foreign exchange reserves rose by 28 per cent last year - proof of its action in the market. But others went further. China's reserves rose by 41 per cent, while both India and Japan saw a 43 per cent rise. Overall, foreign exchange reserves in the region increased by one third last year to total $1,900bn.
Most strategists expect equity inflows into the region will remain strong, yet few are prepared to bet against the ability of the authorities to continue to weaken their own currencies. Japan this month is already rumoured to have spent more than in any single month last year, but the yen is still only just off three-year highs against the dollar.
And this pattern could be repeated across the region. |
