Asian currencies rose on the last trading day of 2016 on Friday, but most were set to post annual losses as the US dollar climbed on expectations of higher interest rates next year. Emerging Asian currencies were generally higher on the day, with the dollar losing some steam after the euro briefly soared on stop-loss buying in thin year-end trading.
"This is more a position adjustment rather than something fundamentally changing in the background," said Sim Moh Siong, FX strategist for Bank of Singapore. "Our view is still for Asian currencies to weaken over the course of next year," he said. While Asian currencies could rebound early in 2017 if the dollar retreats, such a pull-back could provide an opportunity to buy the greenback on dips, Sim added. Investors are waiting to see if US President-elect Donald Trump will quickly push expansionary fiscal policies once he is sworn in on January 20, which would boost expectations for higher inflation and interest rates.
The Chinese yuan was the worst performer among major Asian currencies in 2016, and market watchers expect it to recoil further next year if the dollar continues to climb. The yuan is down nearly 6.6 percent against the dollar in 2016, putting it on track for its biggest annual fall since China established its foreign exchange market in 1994.
Concerns about capital outflows and a slowdown in China's economy have weighed on the yuan along with the stronger dollar, and investors are also worried about a potential increase in US-China trade tensions under the incoming Trump administration.
The Taiwan dollar is on track for an yearly gain of 2.7 percent, making it the best performing emerging Asian currency in 2016. The Taiwan dollar had gained a boost earlier this year, helped by large foreign investor inflows into Taiwanese equities.
Overseas investors, however, have pulled money out of Taiwanese equities in the fourth quarter, and that has weighed on the Taiwan dollar as of late. Emerging Asian currencies have declined broadly since early November as US bond yields jumped on expectations that Trump's proposals for infrastructure spending and tax cuts will boost economic growth and inflation. Worries about Trump's stance on trade have also weighed on the currencies of export-dependent countries in Asia.
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