Strengthening of US dollar could weaken most Asian currencies

SINGAPORE - As the US dollar strengthened further after US Federal Reserve Chairman Ben Bernanke indicated the possibility of scaling back quantitative easing and after discussions among Fed officials of exiting from monetary stimulus during the Federal Open Market Committee (FOMC) meeting last week were revealed, financial analysts here have predicted that majority of the Asian currencies may decline for quite some time to come.

The strength of the US dollar had been bolstered by the minutes of last FOMC meeting and Bernanke's testimony before the US Congress.

Bernanke told US legislators that he did not rule out cutting back on bond-buying program in the coming months if economic data would show significant improvement.

He also opined that the Fed can take the decision to scale back in the next two to three weeks, adding that he would not even rule out a scale back of quantitative easing by US Labor Day.

According to the minutes of their last FOMC meeting, a number of Federal Reserve officials said they were willing to taper down bond buying as early as the next FOMC meeting on June 18 and 19 if economic reports confirm "evidence of sufficiently strong and sustained growth."

Indeed, it has already been a bumpy ride for most Asian currencies in recent weeks. The outlook has turned even less positive for most currencies, given Bernanke's comments and the Fed minutes.

UOB Economic-Treasury Research believed that the fixation with the cutback of quantitative easing will stay with the currency markets for the next few weeks.

The crucial events will now be the US non-farm payrolls due on June 7, followed by the next FOMC decision on June 19 which may lead to the potential announcement of any change in the quantitative easing program.

HSBC Global Research said downward pressure will be felt among Asian currencies where yields are low. In this light, the Singapore dollar, Taiwan dollar and South Korea won will be most vulnerable.

For Singapore dollar, there is still room for it to weaken further against the greenback within the existing policy framework. Both Taiwan dollar and South Korea won will trend lower, particularly if the US dollar goes up even higher against Japanese yen that will make Japanese exports cheaper, forcing the policy makers of its northern Asian neighbors to react in the currency front.

While the Malaysian ringitt, Philippine peso and Thai baht are not immune to strength of the US dollar, HSBC said they should be less sensitive than the Singapore dollar, Taiwan dollar and South Korea won.

The movement of Malaysian ringitt is dictated more by the price of soft commodities such as crude palm oil, whereas in the case of Indonesian rupiah, the drag from a large current account deficit plays the more dominant role than the US dollar's pull factor.

As for the Chinese yuan, HSBC said its outlook is more about reform and liberalization rather than the movement of the US dollar. It is the only Asian currency on which HSBC maintained a positive view in light of the US dollar rally. Any drop of Chinese yuan due to US gain will be temporary and HSBC therefore forecast year-end level of 6.14 Chinese yuan against the US dollar.