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Asian FX a one-way bet despite inflation, says RBS

Royal Bank of Scotland economists believe countries in Asian will strengthen their currency in order to rein in domestic inflationary pressures. And with most regional economies doing well, the bank believes this should not harm export competitiveness. Currencies are in emerging Asia are unlikely to weaken in the foreseeable future despite domestic inflationary pressure which is typically bad for them, economists at Royal Bank of Scotland have argued.

"Asian currencies remain a one-way bet and there is little need to hedge exchange rate exposure," Erik Lueth, senior economist at RBS wrote today (April 26).

Rising inflation levels typically forces affected countries to depreciate their currencies. This is because high inflation erodes a country’s competitiveness and weakens net exports. The drop in exports then reduces demand for the currency, leading countries to depreciate their currency to maintain competitiveness.

However, the strength of economies in the region has meant that there is little evidence of a loss of competitiveness, meaning that countries are unlikely to aggressively devalue their currencies. In fact, contrary to historical trends, appreciation may help tackle domestic inflationary pressure, Leuth notes.

One reason for this is that central banks in Asia typically keep their currencies weak through the purchase of US dollars, to offset the potential damage an appreciating currency can do to export competitiveness.

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