The US Federal Reserve is likely to raise interest rates at a fast pace next year, but its impact on Asia currencies is declining due to the region’s fast-growing economic scale, a UBS currency analyst said in Taipei yesterday.
“We expect [the] Fed to reverse its loose monetary policy stance in June next year, with interest rates to rise to 1.25 percent toward the year-end and climb to 3.25 percent in late 2016,” Singapore-based currency analyst Tan Teck-leng (陳得能) told a news conference.
Tan based his forecast on the US’ tightening monetary cycle in 2004, when Asian currencies weakened significantly ahead of the rate hikes, but rebounded months later.
However, the Fed’s moves may not carry equal weight on Asian currencies this time around, as the region’s economy has made substantial gains in terms of size and pace, Tan said.
Asian GDP was equivalent to about 40 percent of the US economy in 2004, but is expected to grow to the same size as the US’ next year, the analyst said.
Another noteworthy trend is the slowing pace of economic growth among Asian nations, particularly China, which bodes ill for the currencies of Australia, New Zealand and Indonesia, Tan said.
Still, the interest rate hikes by the Fed next year may drive Asian central banks to follow suit, as they did in 2004, Tan said, adding that Asian monetary policymakers are likely to adopt a milder pace.
UBS expects the Chinese yuan to trade at 6.15 against the greenback in the next 12 months, flat from current spot rates, Tan said.
The Swiss banking group remains positive about the yuan on the back of higher interest yields even though there is little room for yuan appreciation, he said.
UBS has a negative view on the Singaporean dollar amid concerns that it could be dragged down by weakness in its trading partners’ currencies and in line with the city-state’s currency policy, Tan said.