Asian currencies are cheap in historical trade-weighted terms despite a steady rise to multi-year highs over the past year on broad US dollar weakness and strong flows into the region, analysts say. Malaysia's ringgit, for instance, has appreciated more than 15 percent against the dollar since the beginning of 2017, but in real effective exchange rate terms (REER), it is still 5 percent below its 10-year average.
REER is calculated on a trade-weighted basis against a basket of currencies and adjusted for inflation. The Japanese yen, Philippine peso and Indonesian rupiah are also trading below their 10-year averages. The rise in regional currencies against their trading partners' currencies over the past year has been much lower than their gains on the dollar, keeping them attractive even now, analysts say.
The South Korean won and the Thai baht have gained more than 12 percent each against the dollar since January 2017, but their REER rates rose just about 4 percent in that period. "If you look at real effective exchange rates, Asian currencies are not very over-valued," said Chang Wei Liang, an FX strategist with Mizuho Bank.
"Asian currencies could still have scope to gain, given the very substantial current account surpluses in their economies." China's yuan and South Korean won's REER rates are the highest in the region, trading at 122.6 and 110.7 respectively, according to a J.P Morgan REER index based at 100 in 2010. Asian exports have largely managed to absorb the rise in regional currencies while benefiting from robust global demand and a recovery in commodity prices. China's exports increased in 2017 for the first time in three years, while Japan's exports saw their biggest growth in seven years.
Despite the baht gaining about 10 percent against the dollar, Thai exports grew 9.9 percent last year, the biggest rise in six years. "Generally exports react more to external demand conditions, rather than currencies," said Mizuho's Chang. "We don't see currency strength holding back exports in Asia, given that external demand is on an upswing at the moment."
Regional trade momentum is set to continue this year with South Korea, for example, showing robust export growth in January driven by computer chips and petroleum products. Nonetheless, the operating profits of Asian companies making much of their revenue from exports are expected to take a hit from the sharp rise in their domestic currencies.
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