BENGALURU (Reuters) - Emerging Asian currencies are expected to lose ground in the year ahead as monetary tightening from the Federal Reserve gathers pace, but uncertainty on future U.S. trade policy will cap dollar gains, a Reuters poll found.
All major Asian currencies, except the Philippine peso, have risen against the dollar this year as investors turned tail on the greenback on growing doubts about the U.S. administration’s ability to push through its promised stimulus and tax cuts.
But the latest poll showed dollar bulls will take charge again soon, with Asian currencies seen ending this month lower and slumping further in the next 12 months, largely underpinned by expectations for a slightly faster pace of U.S. rate hikes.
“We expect the Fed to raise rates more rapidly this year and the next, faster than what the markets expect. We do think the dollar will start to strengthen at some point,” said Julian Evans-Pritchard, economist at Capital Economics.
Minutes from the latest U.S. Federal Reserve meeting suggested the outlook for two more rate hikes had not changed and that most policymakers think the central bank should begin trimming its $4.5 trillion balance sheet later this year.
Following the Fed’s rate hike last month, China’s central bank raised short-term interest rates for the third time in three months in March to stave off capital outflows and keep the yuan stable.
Adding to the near-term risks to where the yuan trades is the outcome of a two-day meeting between President Donald Trump and his Chinese counterpart Xi Jinping that got underway on Thursday.
In one month, the yuan is predicted to trade around where it is was on Thursday, 6.90 per dollar. It is then expected to weaken to 7.05 in six months and fall further to 7.10 in a year, according to the poll of nearly 60 foreign exchange strategists conducted this week.
That 12-month consensus view, if reached, would mark the lowest level for the closely managed yuan in nearly a decade. The most bearish forecast put the yuan at 7.75 per dollar.
But a separate fortnightly Reuters poll on positioning showed speculators increased their bullish bets in the short term on the Chinese currency, Singapore dollar and the South Korean won.
Beyond the near-term, the latest poll showed other major Asian currencies are expected to fall against the dollar.
But any dollar strength will be dependent on some form of fiscal stimulus and tax reforms from the U.S. administration in the year ahead, according to almost 80 percent of 65 strategists in a similar poll on Thursday.
Trump’s failure last month to push through healthcare reform has fuelled concern about his ability to implement his economic policies.
Heading the bearish list for Asian currencies was the Taiwanese dollar, which is forecast to decline 4.5 percent in a year’s time, followed by the South Korean won and the Indian rupee, losing 4.2 percent and 4.1 percent, respectively.
“The prospect of less open trade policies in the U.S. do not bode well for developing economies, which, together with continued Fed policy normalization, could support the dollar,” wrote analysts at Barclays in a research note.
The Taiwanese dollar has been one of Asia’s best-performing currencies this year, gaining 6 percent, largely because the central bank has pulled back from intervention for fear of being labeled a currency manipulator by Trump.
But the export-dependent country’s currency will likely weaken over the coming year. The median forecast for 12 months ahead was 31.75 per dollar, compared to Thursday’s 30.54, even as fears linger of a possible imposition of a border tax on imports by the Trump administration.
The Indian rupee has gained over 4 percent this year on strong foreign inflows, touching 64.84 per dollar late last month, its highest since October 2015.
It is now expected to weaken to 65.43 per dollar in a month, 67.00 by the end of September and 67.50 over the coming year. Those expectations were less pessimistic compared to last month.
The South Korean won, which has gained over 6 percent this year, tumbled to about a three week low on Thursday after Japanese Prime Minister Shinzo Abe and Trump agreed that North Korea’s missile launch was a serious threat, and could weigh on the currency further.
Strategists expect the won to weaken to 1160 in six months and 1174 by end-March next year, from its current level of 1130.
The Thai baht, the Philippine peso, the Singapore dollar and the Vietnamese dong were the other Asian currencies predicted to fall around 3 percent or more.
Polling by Shaloo Shrivastava and Khushboo Mittal; Editing by Shri Navaratnam