After a fairly lucrative year in 2003, emerging market currencies remain a favoured bet in 2004, underpinned by generally high interest rates and healthy balance of payments positions.
Most US currency strategists are particularly upbeat on the Argentine peso and Brazilian real in Latin America, the Polish zloty and the Turkish lira in Europe, and the Singapore dollar in Asia.
Interestingly, most of the emerging economies in all three regions are also running trade or balance of payment surpluses.
The overriding theme in emerging currency markets is "carry trades," involving the sale of low-yielding currencies like the dollar to purchase currencies offering high interest rates like the Brazilian real.
"Any type of carry trade will make sense for 2004," said Daniel Tenengauzer, vice president for foreign exchange at Lehman Brothers in New York.
"One key thing supporting emerging markets is that it's going to take a long time for G10 (interest) rates to start spiking up, with the Fed expected to be on hold for 2004," he said.
"We like Brazil and Turkey - the two highest-yielding trades in emerging markets," said Tenengauzer.
The combination of a 16.5 percent benchmark interest rate in Brazil and a lingering under-valuation following Brazil's 2002 crisis of confidence have enhanced the appeal of the Brazilian currency.
In the case of the Turkish lira, with interest rates at 26 percent even after six rate cuts in 2003, analysts say the currency remains well-supported by an improving inflation outlook and rising domestic investor confidence.
But perhaps one of the more compelling reasons to dip into emerging markets, traditionally a capital-scarce region, is a robust external account position, analysts say.
According to Morgan Stanley data, the emerging economies' average current account balance moved from a deficit of almost $100 billion in the early 1990s to a surplus of almost $150 billion in 2003.
Latin America, notorious in the past for its voracious appetite for foreign capital, has seen its current account deficit - a broad measure of a nation's global trade balance - shrink from some $70 billion to under $10 billion over the past three years alone.
Soaring commodity prices in 2003 fuelled huge trade surpluses for metals-exporting countries like Argentina and Brazil.
"We have these very competitive exchange rates and an increase in commodity prices driving their trade surpluses through the roof. It has been their export sectors that has been spearheading growth and their return to health," said Rafael de la Fuente, chief Latin American economist at BNP Paribas in New York.
Most of the emerging market currencies are also reasonably priced, compared with their economic potential.
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