Singapore and India offer potential standout returns in an environment of Asian currency strength on broad dollar weakness and expectations of a change in Chinese policy, investors and currency strategists say. Asian economies are seen attracting money flowing out of US dollar assets because of their sturdy outlook and a possible revaluation of the Chinese yuan, also called the renminbi.
"All the Asian currencies have been artificially suppressed for a long time," said Ng Swee Kim, fund manager at Nikko Global Asset Management Singapore Ltd.
"It's time for a revaluation. Everybody's looking at a renminbi revaluation and how that benefits others."
Stock markets in Hong Kong, Singapore and India have priced in some of that optimism, having gained between 10 percent and 24 percent since the end of June.
Currencies haven't risen that far, but many are likely to gain further as central banks let them strengthen to reflect comparative economic strengths, investors said.
UBS picked the Singapore dollar, Indian rupee and Taiwan dollar as the most likely to outperform other regional currencies because their respective central banks are more confident about letting the currencies strengthen to tackle inflation.
"There are signs of demand-led inflation in these Asian countries," said Bhanu Baweja, a currency strategist at UBS in Singapore.
The Monetary Authority of Singapore, which uses the currency to steer monetary policy, has a stance of allowing a gradual and modest appreciation of the trade-weighted currency to control inflationary pressures. The currency has gained 4.5 percent against the dollar since the end of June.
Hong Kong and Malaysia have pegged currencies, but investors have speculated that a change in China's yuan policy would see the pegs shift and are positioning themselves for such a move in derivative markets.
However, the South Korean won may lag its peers in coming months since it has already risen 7.6 percent this year to outperform major Asian currencies, analysts said.
The currency will also be weighed down by concerns over weak domestic demand and slowing export growth, said David Simmonds, a Singapore-based emerging markets strategist at Royal Bank of Scotland.
The Philippine peso, which equalled its record low in October, is expected to be undermined by worries about the country's chronic fiscal deficit which has put its credit ratings under pressure.
Asian central banks hold the key to further appreciation in their currencies, strategists said.
Led by Japan and China, the central banks intervened heavily in recent years as governments sought to curb currency strength to protect exports, the key growth engine in the region. Asian central banks hold almost $2.3 trillion in reserve assets.
However, since the start of the dollar's broad decline against major currencies in October, Asian authorities have allowed some appreciation of their currencies in line with their rivals.
"The market is testing the central banks," said Ben Rudd, investment strategist at ABN Amro in Hong Kong.
Asian resistance to currency strength is not expected to be as strong as 2002 and 2003 because central banks are keen to use currency gains to douse inflation, said Simmonds.
After President George W. Bush was elected for a second term, the dollar's losses accelerated as the market fretted about the country's large and growing US current account deficit.
This week, the dollar hit a record low against the euro, a near five-year low against the Singapore dollar, and its weakest rate against the won since the 1997 Asian financial crisis.
The Indian rupee has appreciated after the US election, bolstered by growing optimism about company earnings and a central bank rate rise in late October.
The rupee has gained almost 3 percent against the dollar in the past couple of months.
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