BANGALORE - Emerging Asian currencies are set to fall further against the U.S. dollar over the next year due to concerns the U.S. Federal Reserve will soon begin reducing its stimulus, a Reuters poll showed.
The Fed baffled markets last month by leaving its monthly bond purchase programme unchanged, providing a short respite to battered emerging market currencies which had been hammered due to outflows from those regions since late May.
But analysts said it was only a matter of time until the Fed starts trimming its $85 billion-a-month stimulus, especially if a deal is struck soon over raising the country's debt ceiling.
"For the rest of this year, the U.S. government shutdown and debt ceiling negotiations are key. If we get a quick resolution then we're back to thinking about the Fed tapering and economic data," said Khoon Goh, currency strategist for ANZ in Singapore.
"Also, if we get good U.S. economic data, markets will start expecting the Fed to taper in December or early next year. In that case, Asian currencies will come under pressure again."
The failure of Congress to agree on a new budget by Oct. 1 has shut down huge swathes of the U.S. government for the first time in 17 years.
Goh says a delay in resolving the budget impasse would renew volatility in currency markets, especially if Congress does not reach a deal on raising the country's borrowing limit by Oct. 17 - when the U.S. Treasury will run out of money to meet debt payments.
The poll of 45 currency strategists taken over the past week showed that all emerging Asian currencies, except the Chinese yuan, were expected to depreciate in the next 12 months.
By September 2014, the Indian rupee is expected to fall the most - by around 3.5 percent - followed by the Malaysian ringgit, seen as shedding 2.7 percent.
The Indonesian rupiah and South Korean won were seen depreciating by around 1 percent and 0.6 percent respectively.
The Chinese yuan will likely gain slightly from Thursday's spot rate of 6.12. Although it has risen about 1.8 percent so far this year, the rate of appreciation has slowed in recent months on caution over China's economic slowdown.
The Indian rupee is expected to give up some of its gains over the past month, as concerns over the country's finances and foreign fund outflows will likely keep weighing on investor sentiment.
The Fed's announcement in May that it would begin tapering its monthly stimulus this year caused U.S. bond yields to surge and brought into focus emerging countries' finances, which were fuelled by cheap money from developed markets.
In Asia, India and Indonesia were particularly vulnerable as their bloated current account deficits were financed through dollar inflows that started drying up as investors moved money abroad.
While the Indian rupee has lost around 14 percent since the beginning of May, the Indonesian rupiah has depreciated by 15 percent.
"Current account deficit countries like Indonesia and India will be the most vulnerable. Thailand which has high domestic leverage and has recently slipped into a full year current account deficit is also at risk," said Goh of ANZ.
A Reuters poll after the Fed decision last month showed 9 of 17 primary dealers in the U.S. expect a stimulus reduction to be announced in December.
The latest currency poll showed the Thai baht is expected to depreciate by 2.6 percent to 32 per dollar by September 2014.
Even the South Korean won, with that country's current account surplus, is not expected to stay immune and will likely weaken by the end of 2013 to 1,090 won to the dollar.
"The won will move to 1,100 against the dollar due to uncertainties stemming from the Fed's policy movements as well as worries from capital flight from emerging economies towards the end of October," said Kim Dae-hyung, foreign exchange analyst at Eugene Futures in Seoul.