Asian currencies go from bad to worse: Analysts

Asian currencies go from bad to worse: Analysts

SINGAPORE (Reuters): The aftershocks of the '97 crisis have meant the outlook for Asian regional currencies has never been that bright, but things have recently taken a turn for the worse.

High oil prices and now the worry over global demand for electronics have lately compounded the effect of a stubbornly strong U.S. dollar.

These new factors, analysts say, are only helping unmask some of the nagging structural problems Asian governments have yet to address.

And growing uncertainties in the political pit of the Philippines, Indonesia and Thailand are likely to keep the cauldron on the boil.

"Not only do they (Asian economies) have their own problems, but the external environment has worsened and I can't see that changing for the better in the medium term...say the next six to 12 months," said Mansoor Mohi-uddin, regional currency strategist at UBS Warburg.

The bank's six to 12 month target for the baht is 45, for the peso 48, and for the rupiah 10,000.

The baht was quoted at 43.35 to the dollar, the peso at 48.35, and the rupiah at 8,920 at 0515 GMT on Friday. Even the stalwart Singapore dollar was hovering not far from its 25-month lows of 1.76, a victim of the regional malaise.

Despite lingering doubts about their resolve to restructure debt-ridden corporate and troubled financial sectors, Asian economies rode the tide of strong global growth backed by a booming U.S. economy and low oil prices earlier in the year.

All that changed as oil prices swelled and the U.S. Federal Reserve jacked up interest rates, pushing the dollar higher.

As a result, growth rates are flattening out across the region, trade surpluses are shrinking, and high oil prices are fueling inflationary upticks.

In a recent research report, Merrill Lynch said while export growth was still strong in Asia, a lack of foreign capital inflows, dormant domestic bank lending, and an easing world economy would affect both growth and exports.

Analysts said some of the currencies might have hit a technical floor, as they have already exceeded their year-end targets.

But they predict tough times ahead as the U.S. economy shows signs of slowing, the threat of more U.S. rate hikes remains, and oil prices refuse to subside.

And with most analysts expecting a soft landing for the U.S. economy, the dollar is not likely to shed much of its strength any time soon.

"The dollar will correct as the economy slows down and I believe the huge current account deficit they have will be priced in eventually. But that is likely to happen in a couple of years," said David Simmonds, regional currency strategist at Citibank.

Outflows from the equity markets, tracking the global sell-off in technology shares, are making the outlook even worse.

Nomura Asia, looking at flows of open-end retail mutual funds in the U.S. and Japan, said U.S. investors pulled out $75.2 million in the week ending October 6.

It said year-to-date cumulative flows slipped further into negative territory of $1.4 billion, compared with a net outflow of $180.1 million for the whole of 1999.

Japanese investors pulled out $49.5 million in August -- the third straight month of withdrawals. But year-to-date flows remain well in positive territory at $519.3 million. Last year ended in an overall outflow of $353.5 million.

However, some analysts believe demand for electronics in general, and DRAMs and microchips in particular, was not likely to fall as much as the jitters on Wall Street suggest.

"I believe the techs have been rather oversold. I still think DRAM prices will rebound at some point and the demand will remain strong," Simmonds of Citibank said.

He said the Korean won and Taiwan dollar, given their sensitivity to their equity markets, could hit weaker levels of 1,140 and 31.50 respectively in the short-run.

But a medium-term rebound in equity markets could push the won back to around 1,100 and the Taiwan dollar to 30.50, he said.