For all the talk of competitive devaluation and concerns over excessive yen weakness, Asian currencies will rally modestly in 2013 against the U.S. dollar, helped by superior economic growth and capital inflows, a Reuters poll on Wednesday showed.
The poll of around 70 foreign exchange strategists and economists taken over the past week forecast gains in all nine emerging Asian currencies, with the Singapore dollar and South Korean won expected to be front runners.
Gains over the year will range from less than one percent for currencies such as the Indonesian rupiah, which is under pressure from a deep current account deficit, to slightly more than 1 percent for the Chinese yuan and to as much as 4 percent for the Korean won and the Singapore dollar.
That still makes for a shallower rally in most Asian currencies than seen in 2012, when the won rose nearly 8 percent and the Philippine peso close to 7 percent.
Analysts polled said the risk wasn't insignificant of Asian currencies being held back this year by concerns about competitive currency devaluations as a result of easy monetary policies in advanced economies.
Of immediate concern to Asian policymakers in particular is the yen, which has weakened nearly 15 percent against the dollar since November as the government and the Bank of Japan ramped up efforts to lift the country out of a recession and years of deflation.
"Ongoing quantitative easing policy being maintained in the U.S. will lead investors to Asia," said Mitul Kotecha, head of global currency strategy at Credit Agricole.
"Also, we're going into an environment where risk appetite will be positive for high beta currencies since we think the region will outperform from a growth perspective."
The yen's weakness, if it lasts, would be foremost in a long list of threats to the region's currencies, which includes the fallout from U.S. debt negotiations, a possible spike in U.S. yields causing a run on high-yielding Asian bonds, uncertainty over China's recovery, and the risk of fresh instability in Europe's debt crisis.
Policymakers have so far refrained from acting in any manner suggestive of a competitive battle to weaken currencies.
But South Korea, whose exporters have the most to lose from yen weakness, has said it might impose a tax on financial transactions and China has warned against speculative capital inflows.
"We may see some intensification of measures to remediate and prevent hot-money, volatile flows. But I don't think we will see a full fledged currency war," Kotecha said.
RUPEE TO UNDERPERFORM
Intervention is not the only concern for market participants. They also worry that the massive capital inflows into Asia seen over the past 12 months could begin to reverse, either because investors see improved growth possibilities in developed markets or because the fears of a currency war become self-fulfilling.
That raises the vulnerability of currencies such as the Indian rupee, which despite being Asia's best performer this year, is expected to rise only by around 1 percent over the next 12 months.
"Given its reliance on portfolio flows to finance its current account deficit, the concern is always of a quick funds reversal which will impinge on the rupee," said said Sook Mei, ASEAN Head of Global Markets Research at Bank of Tokyo-Mitsubishi.
Analysts are also not sure how far China, which is keen to rebalance its economy away from exports and towards more stable domestic consumption, will allow the yuan to rise at a time when major economies are trying to keep their currencies down.
By virtue of being the main export market for the likes of Korea and other smaller manufacturers in the region, the yuan's fate would matter most to how much of appreciation other Asian central banks can tolerate in their currencies.
The Chinese yuan is forecast to gain about 1.3 percent this year.
The largest gainer is expected to be the Singapore dollar. Analysts expect that the nature of the managed float of the currency as well as a desire among authorities in the city state to keep asset and other domestic prices down will encourage the nearly 4 percent rally in the currency this year.
(Polling by bureaus across Asia; Graphics by Catherine Trevethan; Editing by Kim Coghill)