Asia Currencies to Fall 12% on Capital Flight, ABN Amro Says

By Lilian Karunungan and David Yong

Sept. 3 (Bloomberg) -- Asian currencies could weaken another 12 percent in the next six to 12 months, with South Korea's won at most risk, as $1 trillion of capital inflows into the region since 2001 reverse, according to ABN Amro Bank NV.

``There is more downside to Asian currencies from a reflow of capital out of Asia,'' Irene Cheung, a Singapore-based strategist at ABN Amro Bank, said in a phone interview. ``The decline could accelerate in the next two months because banks in the U.S. and Europe are pulling out. They are short of cash and need to recapitalize toward year-end.''

Nine of the 10 most-traded currencies in Asia outside Japan weakened in the past month, with the South Korea won leading losses with an 11 percent drop. The won was at 1,134 per dollar as of the 4:00 p.m. close in Seoul yesterday, according to Seoul Money Brokerage Services Ltd. The yuan was little changed, the only currency of the 10 that didn't decline in the past month.

Investors should bet for the won to weaken to 1,200 per dollar by year's end, the weakest since 2003, and buy six-month non-deliverable forward contracts that will profit from a stronger U.S. currency against the Chinese yuan and Taiwan dollar, the Amsterdam-based bank said. Cheung, who confirmed the contents of a research report sent to clients yesterday, declined to forecast forward rates.

Portfolio Selling

As much as $1 trillion flowed into Asia since 2001, of which two-fifths went to China, slightly more than a third to Korea and the rest went mostly to India and Taiwan, according to ABN's estimate.

``There is room for further sell-offs'' of Korean stocks as overseas investors still hold $217 billion of the country's shares, ABN Amro said. The KOSPI index of South Korean shares declined for five of the first eight months of the year.

Selling of Taiwan shares will also continue should the global technology and semiconductor industries slow further, the bank said.

``India is vulnerable, though the risk is not imminent yet, as foreigners have yet to bail out of the SENSEX,'' ABN Amro said, referring to the benchmark index. Foreigners sold $4.3 billion more Indian shares than they bought this year, compared with net purchases of $103 billion since 2001, according to the report.

ABN Amro was bought last year by Royal Bank of Scotland in partnership with Banco Santander SA and Fortis.

To contact the reporters on this story: Lilian Karunungan in Singapore at at lkarunungan@bloomberg.net; David Yong in Kuala Lumpur at dyong@bloomberg.net.