Emerging markets forex rally still has legs

By Vivianne Rodrigues - Analysis

NEW YORK (Reuters) - A multiyear rally in some emerging market currencies still has legs even as the likelihood of interest rate hikes in Europe and the United States increases, economists and strategists said.

Speakers at the Reuters Investment Outlook Summit in New York this week said a combination of higher commodity prices and higher domestic benchmark rates is likely to support currencies in countries like Brazil and Malaysia.

Central banks around the globe are beginning to shift to a rate-raising bias as record energy prices, rising food costs and low rates fuel inflation. Still, some emerging markets will be able to contain accelerating prices without hindering economic growth, the analysts said.

"There will be certainly winners and losers," said Alan Ruskin, chief international strategist at RBS Greenwich Capital, in Greenwich, Connecticut. "As an investor, you want to be in a country which will be raising rates in a position of strength."

Brazil's central bank, which raised rates last week, said on Thursday it will continue to hike benchmark lending costs. Central banks in China, Indonesia, the Philippines and India also lifted rates recently.

The chances of rate increases by the Federal Reserve and the European Central Bank are also increasing. Higher rates in the United States and the euro zone will boost the return of dollar and euro-denominated assets -- but the tightening won't be fast enough to diminish the appeal of some emerging market currencies.

For the second half of 2008, Ruskin favors currencies such as the Brazilian real and the Malaysian ringgit. Gains in other Asian and high-yielding currencies such as the South African rand will be limited, he said.

"Higher oil prices may hurt many Asian currencies," Ruskin said. "But higher oil prices would have a positive impact on Malaysia," which is a net oil exporter.

Robert Sinche, head of strategy for currencies, global rates and commodities at Bank of America, also cites Brazil alongside India, Russia and China as top destinations for equity and currency investors.

"A major shift has happened in the past decade, and the emerging market world now is not just a source of supply but also a source of demand," Sinche said. "Who would imagine 10 years ago that countries like Russia would be among the world's top holders of foreign reserves?"

A decade of fiscal discipline, political stability and export diversification is also likely to help the Mexican peso in the near term, said Firas Askari, a managing director for foreign exchange products at BMO Capital Markets in Montreal.

"Mexico has a more stable, business-friendly government, and they seem to be doing things right," he said.

For long-term investors, Askari also recommends the Brazilian real.

"I'm a big fan of Brazil -- not only do they have things going properly on the political front, they are also huge exporters of food," he said.

(For summit blog: summitnotebook.reuters.com/)

(Reporting by Vivianne Rodrigues; Editing by Jonathan Oatis)