Emerging Asian currencies are set to weaken further this year, but not as much as in 2015, as China allows the yuan to soften and the US dollar is boosted by expectations of higher interest rates, a Reuters poll showed.
The new year also will likely see increased volatility in foreign exchange markets, according to analysts, many of whom were caught off-guard by the People's Bank of China's sharp depreciation of the yuan this week and its effect on regional currencies.
The yuan has fallen 1.4 percent against the dollar so far this year to near five-year lows after the PBOC set weaker midpoint fixings eight sessions in a row.
But on Friday the central bank set the guidance rate higher at 6.5636 per dollar and intervened to support the spot rate via state-owned banks, which some market watchers hoped was a signal that it would not let the currency slip much more for now.
However, the yuan's unexpectedly sharp slide has roiled currencies, stocks and commodities around the world this week, stirring worries that China's actions would trigger competitive devaluations by its trading partners, each intending to safeguard its exporters.
Confusion over China's foreign exchange policy also has sparked concerns about Beijing's ability to manage its slowing economy and any unintended shocks from its push toward more market-oriented reforms.
Those Chinese policy uncertainties are likely to take over from the US Federal Reserve as a principal driver of Asia currency rates, now that the central bank has finally delivered its first rate hike in nearly a decade and signalled gradual follow-up hikes this year.
"The PBOC yuan fixings will be the primary source of volatility in Asian currencies this year," said Qi Gao, currency strategist at Scotiabank.
"Regional currencies can only go down if the PBOC fixes the yuan lower than markets expect and if the dollar rises gradually, as we think it will."
The poll of almost 50 foreign exchange strategists taken this week showed the Indonesian rupiah is expected to lead losses and weaken more than 4 percent in 12 months.
The Singapore dollar, the Taiwan dollar, the Philippine peso and the South Korean won are each seen losing more than 2 percent.
Those expectations are better than the actual falls in Asian currencies in 2015, when debate on the timing of the first US rate hike, which eventually came near the end of the year, fanned the flames of a dollar rally.
In 2015, the rupiah fell a little over 10 percent, while the won and Singapore dollar lost about 7 percent. Malaysia's ringgit, which slumped over 18 percent last year is seen largely trading near its current rate of 4.375 by December.
The Indian rupee which was the most resilient emerging Asian currency in 2015 in the face of the impending US rate hike, but was one of the worst performers a few years ago, will likely lose slightly less than 2 percent this year.
Analysts' predictions of milder falls for Asian currencies this year may hinge on the fact that they don't expect the yuan to weaken much from here on, with the PBOC repeatedly claiming the continued devaluation of the yuan was unjustified.
China's yuan is forecast to weaken just 2 percent this year.
But Chinese officials made similar reassurances after their surprise devaluation of the yuan last August, and the currency ended 2015 down 4.7 percent, its worst yearly loss on record.
The outlook for Asian currencies is slightly better than that of other emerging currencies such as the Brazilian real , South African rand and Turkish lira.
The real plunged 33 percent last year and is forecast to weaken 7 percent more in 2016, while the lira fell 25 percent in 2015 and will slip another 3 percent this year.
"The Fed will drive market sentiment as we get closer to the end of the first quarter and if there is a good grasp of what it will do with interest rates, then the depreciation of Asian currencies will be less pronounced," Gao of Scotiabank added.
Economists polled by Reuters predict the Fed will raise interest rates again in March and follow up with two more increases this year, underpinning the dollar.