Countries experiencing faster recoveries and rising interest rates could see their currencies appreciate, something that could affect their export sectors, says The Wall Street Journal after Australia surprised the world with an increase in its interest rate, the first G20 nation to do so.
The journal explains that money flowing into early-recovery nations could stir up dangerous bubbles in prices of assets such as stocks and real estate—already a concern in parts of Asia.
According to the Journal, Asian currencies broadly rallied against the U.S. dollar after Australia increased its interest rate. The dollar fell 1.28% against the Indonesian rupiah, which hit 9,420 per dollar, the rupiah's strongest level for the year.
The Journal says that several countries have intervened in foreign-exchange markets recently to prevent currencies from appreciating too much against the dollar. In the process, they have accumulated larger dollar reserves.
Most Asian central banks have traditionally waited for the Federal Reserve to raise rates before taking action, says the Journal, adding that waiting for the Fed -- which isn't expected to raise its target until the third quarter of 2010 -- risks stoking inflation and bigger rate increases later. But acting ahead of the Fed could mean unwanted upward pressure on their currencies and even more reserves, notes the newspaper.
Another country that is a candidate for a rate increase is South Korea. According to the Journal, the country has one of the fastest-rebounding economies in the world and has already seen a sharp upturn in property prices and the value of the won, its currency.
Sanjay Mathur, economist at RBS in Singapore, told the Journal that he used Australia's move as a cue to move up his forecast for Korea to raise its target interest rate later this year, rather than in the first quarter of 2010. Other countries expected to tighten monetary policy beginning early next year include Indonesia, Taiwan, India and China.