Strong economic fundamentals and inflation pressure will make room for the appreciation of Asian currencies including the NT dollar against the greenback this year, Pu Yonghao (
"Asian currencies are undervalued," Pu said.
The NT dollar, Singapore dollar, South Korean won, Malaysian ringgit, Indonesian rupee, Philippine peso and Chinese yuan are all likely to enjoy gains against the US dollar this year.
The NT dollar is expected to rise to NT$31.2 against the greenback in 12 months, UBS forecasted. The local currency closed at NT$32.30 on Friday in Taipei.
In a research report last week, an analyst at Barclays Capital recommended that investors buy a one month US dollar/NT dollar put option spread to take advantage of the NT dollar's potential.
Investors can buy a put option on the foreign exchange market that gives them the right to sell a currency at a predetermined level.
Buying a put option spread allows investors to buy one put option and sell another at a lower strike price.
The NT dollar will be boosted by a weak US dollar and declining political risks over the coming months because of expectations that cross-strait relations will improve, analyst Peter Redward said in the report.
The narrowing of the interest rate differential between Taiwan and the US -- which peaked at 396 basis points in June 2006 and dropped to 102 recently -- will have significant consequences for capital flowing into Taiwan and boost the local currency, Redward said.
"The decline in US-Taiwan interest rate differentials reduces the attractiveness of foreign portfolio assets and borrowing in Taiwan dollars, and it increases the attractiveness of remittance inflows and hedging the Taiwan dollar," he wrote.
The US Federal Reserve's rate cut last week, meanwhile, will put pressure on China to accelerate the pace of yuan's appreciation to combat inflation, Pu said.
"Should China continue to raise interest rates to combat inflation, the widening spread between China and the US will attract even more hot money into the country," he said, adding that the yuan would see a 7 percent to 8 percent appreciation against the US dollar this year.
UBS expects the Fed to trim its benchmark rates by another percentage point to 2.75 percent by the end of the year, Pu said.
Nevertheless, Pu said investors should beware of increasing risks pushing the US dollar down against European currencies.
"People are too bogged down by the recent turmoil on the market and the US economic slowdown resulting from the subprime crisis. But they are not taking into account the purchasing power of the dollar," he said.
The euro and the pound rose against the US dollar last week after comments by European Central Bank officials on inflation cooled speculation of a possible euro-zone interest rate cut.
Asked how the introduction of stock-index futures and gold futures trading in China would influence the market, Pu said volatility was to be expected because investors will use the stock-index futures to hedge their investments in the spot market.
Among commodities, Pu is long on precious metals and grains and short on base metals.
UBS also estimated the potential losses of the subprime crisis at US$240 billion for all financial institutions globally. Around US$100 billion in losses have surfaced so far, Pu said, adding that it could take at least two quarters for the credit crisis to stabilize.