The rise of domestic currencies has enhanced the level of optimism over the economic growth in Asia. However, the stronger currencies still pose a significant challenge to the policy makers.Asian economies have been witnessing an unprecedented appreciation in their currencies against a weakening US dollar in the recent past. Throughout 2007, most Asian currencies consistently hit record highs against the depreciating greenback. The central banks have been intervening to hold valuations down in their domestic markets and selling local currency in exchange for US dollars.

As a result, many central banks have amassed huge US dollar reserves, especially People's Bank of China (PBoC) with around $4 tn, according to the International Monetary Fund. In export-oriented countries such as China, maintaining domestic currency weakness is logical since it makes their exports cheaper in greenback, thereby garnering the huge American consumer market. However, appreciation of domestic currency valuations also shock exports countries in terms of costly imports. Experts opine that these developments are not good, especially at a time when the US economy is shaky.

On the other hand, against the US dollar’s weakness, Asian currencies offer some potentially excellent investment opportunities for foreign institutional investors. However, the appreciation of the Asian currencies is not due to US dollar weakness alone. The currency rise is also as a result of healthy economic growth, vigorous capital flows, and strong balance of payment position. Against this backdrop, international investors have stockpiled huge assets to ride on Asian currency strength and have been investing in emerging markets.

The Analyst Magazine, Asian Currencies, policy makers, People's Bank of China , PBoC, International Monetary Fund, American consumer market, US economy, Hong Kong Monetary Authority, HKMA, Jim McCormick, Lehman Brothers, Iinternational investors, Fixed-exchange rate system, Economist.