Most economists remain Asian currency bulls mainly because of the general bearish sentiment on the dollar, the belief Asian currencies are undervalued and the relatively strong growth the region is expected to enjoy this year.
In recent weeks, several Asian currencies have been pushing to highs not seen for years. Chief amongst them the Korean won has broken back below the 1,000 level against the U.S. dollar-last seen during the Asian crisis of 1997-amid signs that the local economy is gradually recovering. The Consumer Expectations Index rose to 99.4 in February from 90.3 in January, its highest level since September 2002 and a survey by the Korea Chamber of Commerce and Industry suggested employers were likely to hire more workers in the second quarter this year, especially in the electronics and semiconductors sectors.
The Bank of Korea has now warned it was willing to intervene 'aggressively' against the won's robust appreciation and stem rampant currency speculation.
Indeed, on Thursday's alone, the Korean central bank was believed to have bought almost $2 billion in the currency markets to put a lid on the won's rally.
Meanwhile, the Taiwan dollar has firmed to its highest level since May 2000.
An 11-day rally only ended last Friday after a local newspaper reported the Central Bank of China, Taiwan's central bank, might intervene to stem the currency's rise and threatened to suspend or revoke banks' foreign exchange licenses if they help offshore speculators.
The currency rally has not been limited to north-Asian currencies. The Singapore dollar is now at its strongest level against the dollar in almost 6 and a half year, and even the Philippine peso, despite investors concerned about the fiscal deficit, has risen to an 19-month high.
Only the Indonesian rupiah has underperformed, mainly because on concern about the impact higher oil prices will have on the economy, prompting Bank Indonesia to intervene to prop its currency up instead of putting a lid on it like the rest of the region.
Yet, while dealers expect the won and other Asian currencies to consolidate around current levels in the near-term, they will expect these currencies to appreciate further over the medium term.
"The trend of stronger Asian currencies still seems to be underappreciated," noted Adrian Mowat, chief equity strategist at JP Morgan in a daily research note.
"We believe strong currencies add to the reflation theme as savers export less capital and more international capital flows in. But they are negative for profits," he pointed.
According to a recent report by the Bank of International Settlement, trading in Asian currencies recorded much faster growth than the global total between 2001 and 2004. Whereas global FX turnover increased 57 percent and 36 percent at current and constant exchange rates respectively, growth rates in Asian currency trading frequently exceeded 100 percent, a recent report showed.
The BIS attributed this rise in Asian foreign exchange trading to investor interest in carry trades, the Asian regional economic recovery and a secular deepening of Asian financial markets.
Asian foreign exchange reserve have also risen substantially climbing to around $2.3 trillion in 2004 from $1.8 trillion the previous year, and while China and Japan were responsible for almost three quarters of this gain, reserve growth was a Pan-Asian phenomenon.
Stephen Green, economist at Standard Chartered attributes the accumulation to three factors: trade surpluses, driven by robust demand from the United States, keen foreign investor interest in the region, and the market's expectation of stronger Asian currencies, notably in currencies which have been pegged, such as the Chinese yuan and the Malaysian ringgit.
"However, the absolute amount of FX build-up is not half as significant as the size of reserves relative to the size of the economy and the size of imports," he noted.
Malaysia and China were the biggest accumulators, with increases in their reserves to GDP ratios of 12.6 and 9.5 percentage points respectively. They were followed by Taiwan, South Korea, Singapore and Japan.
"These reserves are the result of foreign exchange export receipts effectively being converted into domestic currency by the central bank. It is no coincidence that reserve growth was fastest in China and Malaysia whose currencies are both pegged to the dollar. As economic fundamentals and market speculation brought upward pressure on the currencies and the pegs were maintained, accumulation of FX reserves was the inevitable result. There are few better indicators of currencies which should appreciate, but which are not being allowed to," Green noted.
Economists generally believe Asian currencies have more room to appreciate this year, and the greatest pressure for currency appreciation from the perspective of reserve growth is on the yuan and ringgit.