Most Asian currencies are likely to appreciate against the US dollar this year as authorities ease their present strong resistance to strength in their domestic units, Credit Agricole Indosuez predicts.
These economies needed to raise interest rates as inflation started to build but at the same time they did not want to jeopardise the pickup in investments and private consumption, the bank's senior economist Sebastien Barbe said yesterday. Therefore they would try to limit rate increases and would not mirror the expected rise in United States rates in full.
'It will be a shared tightening with a rise in interest rates and an appreciation of the currencies,' he said, while projecting that the US would boost its Federal Funds rate by 100 basis points this year, with the first move in the summer.
Credit Agricole also expected China would adopt more flexibility in the management of the yuan this year as part of its long-term target of opening up its capital account. This would result in only a slight appreciation in the currency - the bank expected the yuan would trade at 8.20 per US dollar by the end of the year from 8.28 now - but it would put pressure on other Asian currencies, Mr Barbe said.
A more significant change in the yuan exchange rate was unlikely as authorities appeared to have chosen to focus first on slowing down credit growth and reforming the banking system, he noted. Since this would restrict the corporate sector, 'the authorities are not likely to add more pressure ... by a significant revaluation of the currency', the bank said.
Other countries in the region, especially South Korea and Taiwan, would accept appreciation by their own units against the US dollar as long as the yen also appreciated. Credit Agricole foresaw a further 6 to 8 per cent rise in the yen against the dollar this year, which would give other regional currencies leeway to appreciate, Mr Barbe said.
