Although Asian economies have fared well compared to their Western-hemisphere counterparts in maintaining stability in domestic currency markets, the real test for regional central banks will be if exports continue to prove weak.
It is likely that markets in Europe and the US will remain sluggish, in which case the second half of 2010 will pose a challenge for Asian economies.
Asian markets, which are heavily reliant on exports and have amassed trade imbalances, will be hard pressed to contain currency appreciation in the case of economies such as China and India. While currencies such as the Australian dollar, which were in fashion from a carry trade perspective, will be faced with decreased demand.
However, while the US dollar has taken a beating in the 12 months ending January 2010, namely in currency pairs such as USD/HKD and USD/JPY, there is still stability to be found in the greenback.
Sovereign risk in what are dubbed ‘the PIIGS' [Portugal, Iceland, Ireland, Greece and Spain] has virtually ruled out any moves into the euro by global central banks, and currencies such as the Swiss franc and Japanese yen are proving volatile in their own right.
As a result, we now see an about-turn on the sentiment of 24 months ago, where central banks had made it quite clear that diversification away from the US dollar would become the norm. Central banks, such as those of China and India, had indicated a rebalancing of reserves to alternative currencies as early as 2007.
The backtrack on being net sellers of the USD has been quite evident. The USD/HKD has gone from 7.75, where it was fixed for the large part of last year, to 7.78 within the first three weeks of this year. The Indian rupee, Korean won, New Taiwan dollar and New Zealand dollar, among others, have also had a roller-coaster ride against the dollar.
For now, Asian economies have successfully managed their economies through the crisis by maintaining their currencies at current levels. Once the crisis passes, we can expect the Asian economies will allow their currencies to appreciate.