South korea, india, vietnam face much tougher times

Experts are warning Vietnam's dong is facing the strongest pressure, and Vietnam could be forced to "realign" its currency.

Morgan Stanley, the second-biggest securities firm in the US, has also predicted South Korea, India and Vietnam will fail to halt declines in their currencies by intervening in foreign-exchange markets, because their economies are slowing and trade deficits are widening.

Bloomberg has quoted Morgan Stanley as saying the central banks of the three countries have "repeatedly" been buying and selling currencies, as the won, rupee and dong have slipped at least 5 per cent so far this year, threatening to accelerate inflation by increasing import costs.

South Korea, the world's sixth-biggest holder of foreign-exchange reserves, pledged "stern action" today to stabilise the won.

"Their intervention will ultimately fail," wrote Stewart Newnham, a Hong Kong-based research analyst at Morgan Stanley.

"The best they can hope for, in our view, is to engineer an orderly decline through a 'smoothing operation'. But maybe Vietnam cannot even achieve that."

Seoul Money Brokerage Services says the won has dropped 10.5 per cent this year - Asia's second-biggest loser after the baht - to 1,041.75 against the US dollar.

India's rupee has lost 8.7 percent to 43.10 to the dollar and the dong has slipped 5 per cent to 16,847 to the dollar.

"By far the strongest pressure is on the Vietnamese dong," wrote Newnham, adding that this was due to its limited foreign-exchange reserves.

Morgan Stanley estimates Vietnam's reserves at US$27 billion (Bt909 billion), compared with India's $302 billion - the world's fourth biggest - and South Korea's $258 billion.

Newnham believes Vietnam will be forced to realign the dong.

Traders are pricing in an 18-per-cent fall in the coming year to 20,500 dong to the dollar, according to offshore 12-month non-deliverable forwards.

The baht has declined for a second day on speculation foreign investors may cut holdings of Thai stocks as inflation accelerates.

Rising costs of oil and rice pushed consumer prices up 8.9 per cent last month.

"There is weak sentiment over the region as a whole," said Tetsuo Yoshikoshi, a market analyst with Sumitomo Mitsui Banking in Singapore.

"Inflation fears continue to dominate the market. The dollar-baht will strengthen further."