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SINGAPORE : Southeast Asian currencies are expected to continue appreciating in the short term.
Market watchers forecast the regional currencies will rise by another two to five per cent before the end of the year, after some of the units hit multi-year highs last week.
Encouraging economic data out of the US is increasing global risk appetite and investors are turning to emerging markets. And that has pushed some Southeast Asian currencies to record highs.
Chia Woon Khien, head of Emerging Markets Strategy, Royal Bank of Scotland, said: "We all know Asian currencies have a lot of strong fundamentals compared to the G10 markets or even with the global EM world - Asia as a block is quite strong."
"A good part of the appreciation that we have seen so far is still very much founded on fundamentals rather than speculation," she added.
Thio Chin Loo, senior currency strategist, BNP Paribas, said: "ASEAN as a grouping have actually been more united, and intra-regional trade investments have increased.
"In addition... China has been a big player as well, investing into this region. So therefore I think domestic demand resilience has been something of note."
Last week, the Malaysian ringgit rose to a new 13-year peak, the Thai baht climbed to its highest in 29 months, while the Singapore dollar hit an all-time high against the US dollar.
Central banks in the region have reportedly stepped up intervention efforts in a bid to prevent their currencies from appreciating too fast amid concerns that speculation may be causing a bubble to form in the region.
But some analysts say there is little that central banks in the region can do to intervene, given rising inflation.
Ms Chia said: "Look at Singapore's inflation versus an average of its trade partners. We're above - where historically Singapore inflation is always below, whether the US or the average of its trade partners.
"So, things have changed. And you can question whether there are some bubbles building in specific pockets in the financial markets or the real estate."
Going forward, analysts say South-east Asian currencies may face some volatility and profit-taking in the short term. Overall though, they remain positive on the outlook over the next 6 to 12 months.
Ms Thio said: "You may not want to take a single currency bet, for example, buying the rupiah because of the concentrated risk and liquidity in the market is a problem. But we do like things like a currency basket where you diversify risk in Asia across various currencies."
BNP Paribas says investing in an ASEAN currency basket is likely to yield returns of between 4 and 5 per cent.
Meanwhile, RBS favours fixed income assets, such as Malaysian, Indonesian and Thai government bonds, over the next 3 to 6 months. It forecasts 10-year currency bonds in Southeast Asia to yield returns of between 5 and 10 per cent.
- CNA/al
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