Silent War

[muse]

Japan FX action heralds new hot EM money battle

LONDON: Japan’s yen-selling intervention represents a new headache for emerging markets already battling with huge capital inflows and could set off another round of steps to control the floodgates.

Japan spent an estimated $20 billion in a single day of intervention on Wednesday and pointedly did not drain yen funds, leaving extra liquidity in the domestic banking system.

With banks in Japan and the rest of the developed world proving reluctant to lend to businesses and households domestically, this liquidity could eventually leave Japan — where a stagnant economy has kept interest rates near zero for the past decade — in a search for yield.

With borrowing costs in the developed world stuck near zero and speculation of further easing, emerging markets stand out as the top destination. The resulting impact on inflation would be troublesome for emerging economies, which are generally recovering faster, and where the Institute of International Finance expects to see inflows of over $700 billion in 2010.

Policy tightening measures to curb inflation would attract even more flows, creating a vicious circle. “A huge pool of liquidity is being created in developed economies and Japan is just another drop in that pool. Ideally you want this liquidity lent out to the domestic economy but some of it will end up in emerging economies,” said Michala Marcussen, head of global economics at Societe Generale.

She said this could trigger a new round of restriction to capital flows, following those in Latin America in the 1970-80s, in Asia in the early 1990s and emerging Europe in the 2000s.

“We’ve already seen a couple of policy measures taken by various countries. We could see more. It could potentially lead to a fourth wave of capital controls,” Marcussen said.

Fund tracker EPFR data shows emerging equity and bond funds saw inflows of $73.49 billion so far this year, already approaching last year’s total inflows of $75 billion.

Silent global war: Brazil, which already imposes tax on inflows, was the first one to threaten more action. Hours after Japan intervened, Finance Minister Guido Mantega said he would not sit on the sidelines “watching the game” while others weakened their currencies at the expense of Brazil.

“We’re going to take appropriate measures to stop the real from appreciating,” he said. “We’re watching every market, every part, for inflows... If inflows come we’ll buy it all. We’re not going to leave any excess of dollars in the market.” Japanese retail investors already have huge stakes in Latin America, especially Brazil, with one in five polled by Reuters favouring Brazilian stocks.

Brazil has put words into action, calling auctions twice a day to buy dollars in the spot market and increasing the amount it buys. Last Thursday alone, the central bank purchased more than it did during the whole of February. Next possible steps include an auction of reverse swaps, a form of derivative, which has the same effect as buying dollars in the futures market.

Columbia intervened in its market on Wednesday, kicking off a four-month programme to buy at least $20 million a day to help ease the rise of its currency. Other countries that moved to curb local currency strength this week include South Korea and Thailand.

“It’s the latest episode of ... the ‘silent war’ which is taking place in global currency markets,” said Andre Perfeito, economist at Gradual Investimentos in Sao Paulo. The International Monetary Fund has endorsed capital controls as a way to curb capital surges, which some economists say have prompted emerging economies to adopt them.

Benefiting from inflows: Instead of stemming it, some countries are exploiting the benefit of capital inflows, using extra FX reserves accumulated by intervention to create a sovereign wealth fund. The $3 trillion industry is seen doubling in less than 10 years.

Back in 2007, China issued 1.55 trillion yuan in special bonds to buy about $200 billion of central bank reserves to create China Investment Corporation. That sum has grown to $300 billion and the CIC has been lobbying for additional funding. South Korea plans to inject more than $5 billion into its SWF. Brazil said it could use the SWF to absorb extra dollars from a planned share offering of Petrobras.

Authorities are under pressure to effectively manage reserves, which is essentially national savings, and also maintain financial stability by not taking too much risk.

“One way of squaring this circle is to set up a SWF with a very clear mandate to manage long-term national savings,” said Andrew Rozanov, head of sovereign advisory at Permal Investment Management. Rozanov, who coined the term sovereign wealth fund in 2005, suggests a one-off swap of funds between dollar-heavy reserves and national pension funds that tend to have a high home bias. reuters

 

[muse]

Circular firing squad
By Chan Akya

Leave it to an emerging power to let the cat out the bag. On Monday, September 27, Brazilian Finance Minister Guido Mantega issued a "currency war alert", in effect disclosing to the general public what had been suspected in financial circles for a while. As the Financial Times reported on the day:

Mr Mantega's comments in Sao Paulo on Monday follow a series of recent interventions by central banks, in Japan, South Korea and Taiwan in an effort to make their currencies cheaper. China, an export powerhouse, has continued to suppress the value of the renminbi [or yuan], in spite of pressure from the US to allow it to rise, while officials from countries ranging from Singapore to Colombia have issued warnings over the strength of their currencies.

"We're in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness," Mr Mantega said. By publicly asserting the existence of a "currency war", Mr Mantega has admitted what many policymakers have been saying in private: a rising number of countries see a weaker exchange rate as a way to lift their economies.

A weaker exchange rate makes a country's exports cheaper, potentially boosting a key source of growth for economies battling to find growth as they emerge from the global downturn.


Here is a graph from Bloomberg (the professional service) that shows relative currency movements from the beginning of May this year to the end of September.

Mr Mantega is on to something for sure. Even as the Japanese yen (JPY) rose over 10% in nominal terms (ie real rather than annualized terms) against the US dollar (USD), the Chinese yuan has barely budged while both the Korean won (KRW) and Indian rupee (INR) are slightly weaker against the US dollar for the period even though a pronounced strengthening after an initial selloff is visible.

In a word, this is impossible due mainly to the dynamics of Asian trade and the generic correlation in the exports of all these countries to non-Asian economies. Furthermore, investment flows cannot account for any major discrepancy here due to the simple fact that China is the biggest recipient of inflows even as Japan is (at times) a net exporter of capital.

Looking outside the Asian zone, it is clear that many other currencies have become more volatile against the US dollar - in particular commodity-based currencies such as the Brazil real (BRL), Canadian Dollar (CAD) and Australian dollar (AUD); which are shown in the following chart, again from Bloomberg, against the "base" performance of the euro (EUR). While the Australian dollar is the best performer as it has seen the balance of commodity prices and Asian demand, others such as the real haven't lagged behind by much once the risk appetite jitters commenced in earnest at the end of June.

A word here about the euro. This is a currency that this column has not been incredibly fond of for a while now. Still, when readers consider that the primary concerns in Europe range from a sovereign debt crisis to public anger over proposed (and fairly mild rather than draconian) austerity measures, it sometimes defies belief that any central banker would increase his allocation to an alleged reserve currency called the EUR.

I predict that in years to come at least a few Asian central bankers will be stoned to death or meet some such unsavory fate for their decision to cram euros into their bank's foreign exchange reserves. That of course is a matter for discussion another day.

Turning back to the focus of this article, namely the currency manipulation of the Asian economies, the US House of Representatives acted against China on Wednesday by passing by wide margin legislation aimed at imposing tariffs on Chinese-made goods. It is unlikely that the legislation actually becomes law - and it has yet to go through the Senate - but it nevertheless highlights the growing friction between Group of 20 governments as everyone attempts the same solution of "exporting their way to growth".

As the Wall Street Journal reported on September 30:

WASHINGTON - The House of Representatives by a wide margin passed legislation to penalize China's foreign-exchange practices, sending a powerful warning to Beijing but risking a response that could harm US companies and consumers.

The measure would allow, but not require, the US to levy tariffs on countries that undervalue their currencies, which makes their goods cheaper relative to American products. A majority of Republicans lined up with Democrats to pass the bill on a 348-79 vote, highlighting lawmakers' long-simmering frustration with Chinese trade practices as well as their sensitivity to the faltering US economic recovery with an election looming.

The vote marks the strongest trade measure aimed at China to make it through a chamber of Congress after more than a decade of threats by lawmakers. But despite the broad support Wednesday, dim Senate prospects make it unlikely the measure would become law this year. Chinese Commerce Ministry spokesman Yao Jian said Thursday it would be a breach of World Trade Organization rules to conduct anti-subsidy investigations based on exchange-rate concerns, according to the official Xinhua news agency. He said China is willing to take joint actions with the US to help balance trade flows between the two countries, but he said China doesn't undervalue its currency to obtain a competitive advantage.

This column has previously cited the faulty logic behind the notion of export-led recoveries that were being engineered (ostensibly at least) by a good 70% of the world's major economies after the recent G-20 meetings. A sample set of economic observations reveals:
No growth in consumption across the major Western economies whether you look at the US or Western Europe (Germany is an exception, but it is not sufficient to pull the entire continent out of trouble).
Volatile business confidence - some say it is rising and others that it is declining. All we know is that there is no follow through towards new business investments anywhere in the world outside the command economies such as China.
Lack of credit for small businesses being made available by banks that were (ironically) bailed out with taxpayer money less than two years ago.
Continued decline in home prices afflicting the most leveraged and bubble-prone economies of the US, Spain, Ireland and the UK (as well as continuing bad news in the likes of China and Japan on that score at least).
Central banks are once again talking up the use of quantitative easing (QE) instead of admitting that they were wrong the first time around and simply giving up the ghost on the idea (see Unintended consequences, Asia Times Online, August 9, 2010 and Double or quits, Asia Times Online, October 6, 2009).

True, it is not all doom and gloom out there. For example, a look at the stock markets from Bloomberg for the third quarter shows a picture not so much of gloom but of serious rallies, to some extent supporting the view of the monetarists (and in this case Keynesians) that adding money to the economy certainly helps in pumping up asset prices:

Equally though, one can argue that stock market rallies represent the opposite side of the credit market weakness, namely that wealth being borrowed by the governments is becoming more expensive, as shown by credit default spreads from Bloomberg for three European countries that have become the byword for the sovereign debt crisis globally - namely Ireland, Greece and Portugal:

Strangely, the worsening crisis outlook for Ireland and Portugal has actually helped Greece as traders cover their profitable positions (short) in Greece to buy more insurance (protection) in higher-rated countries such as Ireland and Portugal. Considering that all three countries use the euro for their internal transactions, my earlier statement about the idiocy of using that currency as a reserve comes to mind here.

As I wrote last week, (Salami tactics, Asia Times Online, September 25, 2010), it appears that investors are being fooled into the markets by their incessant barrage of "news" whether any of it has actual relevance for investing or not. In that environment, it sometimes proves interesting if not profitable to take a step back and think about a more logical sequence of events that have followed:
A lot of hot air about coordinated intervention to save the global economy.
Deficit-inducing measures that aimed to increase the public sector's role against the collapsing private sector.
Flooding the market with liquidity; which helped to push down yields on government bonds.
Rising government debt that investors soon tired of and demanded to be protected from.
Refocus away from the public sector to export-oriented growth.
Competitive devaluation.
Trade wars as the next step?

While the primary purpose of the G-20 meetings was to set governments in a straight line all firing at a common target, namely the global recession, it appears that the primal centrifugal forces of trade have helped to twist that line into a circle; creating in effect a circular firing squad.

 

[muse]

It's a civilized rejoinder, but nevertheless...One wonders if Washington is listening or is it determined to rip off the world come hell or high water


Date:02/10/2010 URL: The Hindu : Opinion / Editorials : Currency concerns
Back


Opinion - Editorials

Currency concerns


The general weakening of currencies across the global markets has been described by Brazil's Finance Minister Guido Montego as a manifestation of an “international currency war” that is threatening to take away his country's competitiveness.

Indeed for a variety of reasons, many governments have been pursuing policies which, directly or indirectly, lower the external value of their currencies. The United States and a few other issuers of reserve currencies have embarked on a monetary expansion to check falling domestic demand while a few others, notably China, have intervened to keep their currencies from rising.

The alleged “currency manipulation” by China has invited some strong words and, even threats of counter action by the U.S. In the past, there have been currency conflicts and efforts to prevent the situation from getting out of hand.

In September 1985, the U.S., the U.K., France, West Germany, and Japan jointly decided to push for dollar depreciation. Even earlier, in 1971, the U.S. abruptly ended the dollar's convertibility into gold, signalling a preference for cheaper currency.

What makes the present situation different is the emergence of China as the world's second largest economy. Besides, an agreement at the global level is not easy to arrive at because of the variation in the pace of recovery and the divergence in strategies among the major economies.

India, Brazil, and other emerging economies have had to reckon with a surfeit of capital inflows which, unless properly handled, can threaten macroeconomic management.

Brazil has tried a Tobin-type tax, with only limited results. India has traditionally depended on a two-stage intervention by the RBI to check a sharp rupee appreciation. Surplus dollars were mopped up and it was followed, wherever necessary, by sterilisation of excess domestic liquidity.

Reducing the volatility of the rupee and building up adequate reserves to guard against risks have been the other objectives.

Yet, for reasons that are not clear, the RBI has stayed away from the foreign exchange markets since August 2009. The rupee has appreciated sharply in relation to the dollar. More light on India's apparently contrarian stance might be shed in the next credit policy statement, due in early November.

Given the present levels of coordination in international forums, these concerns across the world may not result in currency wars or mutually injurious “beggar thy neighbour policies.” However, since currency-related disputes are but a manifestation of the bigger problem of global imbalances, the ongoing efforts at correcting the imbalances in an orderly way need to be pursued vigorously.

 

[below_freezing]

very interesting financial news. i'm still trying to understand it completely.

 

[muse]

Hostilities escalate to hidden currency war

By Alan Beattie

Published: September 27 2010 17:58

Everyone has been thinking it, but Guido Mantega, the Brazilian finance minister, has been one of the few policymakers publicly to admit it. His assertion that there is a currency war going on follows a recent escalation of competitive intervention in the foreign exchange markets, with heavyweight powers armed with serious weaponry getting involved.

Although some argue that a generalised burst of foreign exchange intervention could act as a global monetary easing, a more widespread view is that such a round of competitive devaluation is more likely to inflame international tensions.

It was a symbolic moment when Japan this month ended its six-year abstinence from intervening in the foreign exchange markets and sold an estimated $20bn of yen. Japan is the only one of the large industrialised Group of Seven economies regularly to have used currency intervention over the past 20 years. But its traditional rationale – that interest rates were so close to zero that conventional monetary policy was losing its strength – now applies to many more countries.

Aside from China, whose intervention is one of the main causes of the global currency battle, several big economies have been intervening for some time. Switzerland started unilateral intervention against the Swiss franc last year for the first time since 2002 and did not sterilise it by buying back in the domestic money markets what it had sold across the foreign exchanges.

In common with several east Asian countries, South Korea, host of the Group of 20 summit, has been intervening intermittently to hold down the won during the course of this year. Deliberately weakening a currency while running a strong current account surplus has raised eyebrows in Washington.

Recently it was revealed that Brazil itself, which has been expressing concern since last year about inflows of hot money pushing up the real and unbalancing the economy, had given authority to its sovereign wealth fund to sell the real on its behalf.

The resort to unilateralism bodes ill for US hopes of assembling an international coalition of countries at the forthcoming G20 meeting to put pressure on China over its interventions to prevent the renminbi rising. While most of the countries currently intervening would be likely to welcome a revaluation of the renminbi, few emerging market governments seem to want to stand up to China publicly – barring sporadic criticism such as that from Brazilian and Indian central bankers earlier this year.

Last week Celso Amorim, Brazil’s foreign minister, said that he did not want to become part of an organised campaign. Following a meeting of the Brics countries – Brazil, Russia, India and China – in New York, he told Reuters: “I believe that this idea of putting pressure on a country is not the right way for finding solutions.”

Mr Amorim added: “We have good co-ordination with China and we’ve been talking to them. We can’t forget that China is currently our main customer.” Brazil exports commodities to China.

Some, such as the Berkeley economist Barry Eichengreen, argue that attempts at competitive devaluation may not be a bad thing. If countries are essentially creating more of their own currency to sell, that in effect means they are loosening monetary policy. So a round of attempted devaluations, rather than being a zero-sum game, could end up as a form of semi-coordinated monetary easing.

But others warn that this rosy scenario ignores the confusion that may arise when every country is intervening against its own currency in the foreign exchange markets, conveying a spirit of competition rather than co-operation. Ted Truman, a former US Treasury and Federal Reserve official now at the Peterson Institute in Washington, says: “Mixing up intervention and monetary policy can be dangerous. Trying to calibrate the extent of intervention is going to be very hard when people don’t really know what they are doing.”

Mr Truman says that given the weak global recovery there may be a case for central banks to move towards quantitative easing, seeking to boost the money supply further. But he says it is far better for each country to do so in its own domestic money markets than by intervening in the currency markets.

For the moment, co-ordination seems further away than ever. And since every country cannot devalue at the same time, and given that some authorities – such as the Europeans and Americans – are generally less willing than others to intervene to suppress their currencies, more competitive devaluation could provoke sharp and destabilising movements in currencies.

 

[muse]

Currency devaluation is a fact of life, not a threat

By Kit Juckes

Published: September 28 2010

Guido Mantega, Brazil’s finance minister, has let the cat out of the bag by declaring that he is in the middle of a currency war, says Kit Juckes, head of FX strategy at Société Générale.

Mr Juckes says the comments are simply recognising the reality that competitive currency devaluation by the US and now Japan is a fact of life, not a threat.

But he says it highlights for countries such as Brazil, whose currencies are soaring, that there are three choices. “Allow the currency to rise and hope it doesn’t crush your exports. Intervene, and watch your reserves grow and liquidity slosh around your economy, sending asset prices to the moon. Or put artificial barriers in the way in the form of capital controls, hoping to stem the tide.”

Mr Juckes says the third might be the smartest option, and the more people do it, the messier the global financial map will look – and the greater the threat of trade wars.

“We have seen before what happens when a fast-growing part of the globe inherits inappropriate monetary policy – the late 1990s Asian credit and currency crisis was born out of the low Fed funds of 1993 and the fixed exchange rate links of the period.”

This time, Mr Juckes says, the story is greatly magnified. “There is scope for asset bubbles of epic proportions to develop if currency policy settings are left in place for too long.”

 

[muse]

France woos China over currency talks

By Peggy Hollinger in Paris and Chris Giles in London

Published: October 1 2010

France and China have been in talks for the past year over whether there should be heightened co-ordination of exchange rates to promote stability of the international monetary system in the wake of the financial crisis.

The talks and their content have been kept secret, in an attempt to draw China into a discussion on global currency co-ordination, a subject that Beijing has been reluctant to countenance in the past.

In an ambitious move reminiscent of the currency accords of the 1980s, President Nicolas Sarkozy hopes to open a debate on the subject when France takes over the presidency of the G20 group of leading nations in November, according to people familiar with the matter.

France has long advocated greater global economic governance. This summer, in a speech to French ambassadors on France’s priorities for the G20, Mr Sarkozy called for a “new framework for discussing currency movements”.

Mr Sarkozy is hoping to win Chinese support for a common approach during discussions with Hu Jintao in November, when the Chinese president visits Paris.

The move comes against the background of rising concern over exchange-rate interventions by a host of countries, most notably China but also Japan and South Korea, to prevent their currencies from rising against the dollar.

Though China has recently allowed the renminbi to appreciate modestly, the US House of Representatives passed a bill this week allowing the administration to impose duties on Chinese imports because of currency undervaluation.

The bill must pass the Senate and be approved by President Barack Obama before it becomes law, but its initial passage reflects growing anger in Congress. China, which is on track to surpass Japan this year as the world’s second-largest economy, has resisted pressure for years, especially from the US, for substantial appreciation of its currency.

People familiar with the matter said France wanted to open the debate during the G20, rather than push a particular view, and was not proposing fixing rates. One priority would be to identify which institution should deal with global currency issues, the sources said.

Mr Sarkozy is planning to discuss currency co-ordination with Mr Obama when he next visits Washington. Germany too will be approached, and the subject may be raised when Mr Sarkozy meets Angela Merkel, German chancellor, in Deauville on France’s Normandy coast this month.

The French and German leaders are set to meet Dmitry Medvedev, Russian president, to discuss joint security concerns and priorities for the G20.

 

[muse]

France denies secret talks with China

PARIS: France has not held secret talks with China as part of an effort to heighten coordination of exchange rates, a French presidential palace source said on Saturday, dismissing an earlier Financial Times report.

The London-based paper said talks had been going on for a year and that Paris wanted to open the debate during the G20, rather than push a particular view, and was not proposing fixing rates. “There have been no secret negotiations on exchange rates with any of our G20 partners, not the Chinese or any other partner,” the source at the Elysee palace told Reuters.

President Nicolas Sarkozy has said that promoting international monetary stability will be high on his agenda when France takes over the rotating chair of the Group of 20 major economies in November. One priority will be to identify which institution should deal with global currency issues, the paper quoted sources familiar with the matter as saying.

“The information published in the FT is “without foundation,” the source said. France, frequently mistrustful of untrammelled market forces, has been a voice in the wilderness for years calling for global coordination of currencies. “France has of course started the consultation process with major partners on the topics that will be central to its presidency, including the reform of the monetary system, so that we gather everybody’s views,” said a second French diplomatic source, adding there was nothing secretive about the talks.

Sarkozy agenda: Sarkozy’s agenda may appeal to the economies of China, India, Brazil and Russia, irked by the dollar’s hegemony, while offering sufficient incentive to draw in the United States and Britain, despite their belief in floating exchange rates.

It also has a domestic payoff for a president hoping to leverage his international statesmanship to revive his battered popularity and neutralise a highly popular potential rival ahead of a tough 2012 re-election campaign.

Policy moves by the Chinese government to free the yuan from a dollar peg will help the Chinese currency rise, Dominique Strauss-Kahn, the head of the IMF said on Saturday.

Beijing has rejected any international discussion of its foreign exchange policy to date and blocked an attempt by G20 leaders in June to praise its decision to allow greater flexibility in the yuan’s exchange rate in their communique. reuters

 

[muse]

Ok - so you may not be following how this will effect you - but it will, just trust me - it's more important that you read and be aware than it is for you to comment.

 

[Vassnti]

It's a civilized rejoinder, but nevertheless...One wonders if Washington is listening or is it determined to rip off the world come hell or high water

A little confused and i would apreciate if you expand on this comment. What i gain from reading the articles is that it sems there will be no change in China's currency policy in the near future so other countries are trying to keep their currency low so as not to loose their export advantage.

Although i agree US "banks" caused the current economic down turn, the current race to the bottom in the currency market is fueled more by China's position than Americas?

 

[muse]

More than a little, the editorial appears in a respectable Indian paper - and I bolded the part you may have found interesting:

India has traditionally depended on a two-stage intervention by the RBI to check a sharp rupee appreciation. Surplus dollars were mopped up and it was followed, wherever necessary, by sterilisation of excess domestic liquidity.

Reducing the volatility of the rupee and building up adequate reserves to guard against risks have been the other objectives.

Yet, for reasons that are not clear, the RBI has stayed away from the foreign exchange markets since August 2009. The rupee has appreciated sharply in relation to the dollar. More light on India's apparently contrarian stance might be shed in the next credit policy statement, due in early November

The rejoinder has thus far been civilized, how much longer are The Indian to allow , or not, the Rupee to appreciate, even as the dollar continues to devalue, making Indian goods more expensive.

 

[muse]

http://business.inquirer.net/money/...-braces-for-currency-wars-but-options-limited


Asia braces for currency wars but options limited


By Martin Abbugao
Agence France-Presse

Posted date: October 10, 2010

SINGAPORE – Emerging Asia is braced for collateral damage in case of an all-out currency war between the world's most powerful economies, but regional governments have limited options, economists said.

The subject dominated annual International Monetary Fund talks in Washington at the weekend, but there was no consensus as the United States and China wage an acrimonious dispute over Beijing's currency policies.

"I strongly hope that this will not escalate into an all-out war," said Cyn Young Park, a senior economist at the Asian Development Bank (ADB), voicing fears any conflict could derail the world's fragile recovery from recession.

"We are now at the stage where many countries have to maintain the recovery momentum and it is really counterproductive that we slip into protectionism, whether it is trade or financial," she told AFP.

Battered by the financial turmoil that began in 2008, the United States, Japan and Europe are moving to weaken or cap their currencies in a bid to make their exports more competitive in the global market.

The war drums grew louder as the United States, facing midterm elections next month, mounted a high-profile campaign to pressure China to allow the yuan currency to rise more rapidly against the dollar to correct trade imbalances.

As China dug in, Japan intervened in the market for the first time in six years to stem a sharp rise in the yen.

Emerging Asian economies are caught in the cross-fire. With Beijing keeping a tight rein on its exchange rate, their currencies have risen faster against the dollar than has the Chinese yuan, making their exports less competitive.

The United States and Britain have also injected more money into their banking systems to stimulate growth.

But with growth in the US, Japan and Europe anaemic, a large chunk of the money is heading to emerging markets, including in Asia, where it stands to gain better yields, said David Carbon, an economist with Singapore's DBS Bank.

According to the Washington-based Institute of International Finance, net private capital flows to emerging economies are projected to reach 825 billion dollars this year, or over two billion dollars a day, up from 581 billion dollars in 2009.

The massive inflow has been a key factor pushing Asian currencies higher. It has also led to steep gains in stocks and property prices, stoking fears of "bubbles" which could later burst if the money exits as fast as it has come in.

Pressure is now on Asian policymakers to limit the rise in their currencies and yet at the same time manage the effects of growing inflation, as well as the rising asset prices.

DBS Bank said that since January, Asian currencies have gained by 6.0 percent on average against the dollar, with the Malaysian ringgit and the Thai baht up the most at 9.0 percent.

Comparatively, the yuan appreciated by only 2.0 percent.

While market intervention remains an option, many central banks are preferring to keep their powder dry because of inflationary risks.

The Malaysian ringgit has been trading at a 13-year high against the dollar, but the central bank has said the strength in the currency reflects Malaysia's robust 9.5 percent economic growth rate in the first half of the year.

Bank Negara, the Malaysian central bank, said it would only intervene if there were any sudden or excessive movements.

A decision to intervene is not simple for the Reserve Bank of India, despite the rupee reaching over a two-year high against the dollar, as a strong currency is helping the central bank battle rising inflation, officials said.

South Korea is one country that is said by traders to have intervened repeatedly in the currency markets to put the brakes on the won's rapid ascent.

Thailand's central bank declined to say whether it intervened in the market after the baht hit a 13-year high against the dollar last week but dealers suspected it might have bought dollars.

In the Philippines, officials have expressed concern over the rise of the peso, but also admitted that the government had limited resources to help exporters deal with the problem.

"Policymakers in smaller Asian countries have to accept that they are powerless in the face of policy decisions made by the G3 (US, Europe and Japan) and China," said Manu Bhaskaran, head of economic research at consultancy Centennial Group Inc.

Their options include imposing capital controls and introducing measures restricting foreign investors' access to some assets, he said, citing Singapore's recent measures to cool down its property market.

But that risks setting off a round of beggar-thy-neighbour policies that jeopardises the global recovery, analysts say. Battle will be rejoined at upcoming G20 meetings in South Korea.