America's smaller Asia allies may face biggest currency reversal

[SINGAPORE] Asia's top two performing currencies so far this year are unlikely to enjoy prolonged gains, with the new US administration's increasing turn toward protectionism set to hit the economies of South Korea and Taiwan, analysts warn.

Rhetoric from US President Donald Trump's administration blasting the alleged manipulation of exchange rates abroad has helped Taiwan's dollar and the South Korean won advance 3.9 per cent and 5.3 per cent against the US dollar since the year started.

The thinking: these two open-market US allies would scale back intervention aimed at slowing gains in their currencies.

Traders are underestimating the risks in Asia from Mr Trump's protectionism, Goldman Sachs Asset Management and Societe Generale SA said in recent reports.

With their economies so reliant on exports - at the equivalent of 60 per cent gross domestic product for Taiwan, and about half for South Korea - the two economies are particularly vulnerable.

"They could be targeted by the new administration," Rajeev De Mello, who oversees about US$11.7 billion as head of Asian fixed income in Singapore at Schroder Investment Management Ltd said of South Korea and Taiwan.

While Mr De Mello has long positions on both currencies, he said "I'm a bit careful" given the looming risks.

As major suppliers for Chinese manufacturers, South Korea and Taiwan could become collateral damage in any trade war between the US and China, the nation singled out for criticism by Mr Trump on the campaign trail last year.

Along with China, South Korea and Taiwan were listed in the US Treasury Department's currency watch list in October, given their large current-account surpluses. Taiwan's current-account surplus was projected to reach more than 14 per cent of GDP in 2016, the most in the region after Singapore and Thailand, based on Bloomberg surveys of economists. Korea's accounts for about 7 per cent, the nation's central bank said.

The won was at 1,147.40 per USdollar on Friday in Asia, and Taiwan's dollar at NT$31.05. By year-end, the won will weaken to 1,250 and Taiwan's currency to NT$33 per US dollar, said Masakatsu Fukaya, a Tokyo-based emerging-markets trader at Mizuho Bank Ltd.

The likely declines ironically would be what Mr Trump's team wouldn't want as depreciation makes their products cheaper and more competitive in global trade.

Along with external factors including the Federal Reserve's rate path, should the US exit or renegotiate a free trade agreement with South Korea, or impose across-the-board tariffs, Nomura Holdings Inc sees the won potentially depreciating to as low as 1,290 per US dollar by end-December. That would be a slide of 11 per cent from current levels.

"We would expect the US to intensify its monitoring of Korean won movements and see a risk that South Korea, in addition to China, is declared a currency manipulator," Young Sun Kwon, an economist in Hong Kong at Nomura, wrote in a Jan 27 report.

BLOOMBERG