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 US 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 US, 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 US, 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 US and Britain have also injected more money into their banking systems to stimulate growth.
But with growth in the US, Japan and Europe anemic, 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 US$825 billion this year, or over $2 billion a day, up from $581 billion 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-neighbor policies that jeopardizes the global recovery, analysts say. Battle will be rejoined at upcoming G20 meetings in South Korea.
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