Goldman downgrades emerging Asia currencies

Sha Ying | CNBC

U.S. investment bank Goldman Sachs says it expects the rout in Asian emerging market currencies to continue, downgrading its forecasts for battered currencies in the region.

Goldman revised down its three, six and 12-month targets for the Malaysian ringgit, Thai Baht and Indonesian rupiah on Friday.

The currencies, together with their emerging-market peers, have taken a beating recently amid expectations for an unwinding of U.S. monetary stimulus.

(Read more: Emerging markets: dissecting the good from bad)

The rupiah should take the biggest hit as investors flee the volatile group of currencies for the safety of developed markets, according to Goldman.

It expects the rupiah to weaken to 11,800 per dollar in the next year, compared with a previous target of 10,500. That implies a fall of 9 percent from current levels of 10,830.

The rupiah hit its lowest level in more than four years on Friday, racking up losses of 12 percent in the year-to-date.

(Read more: Strategist who correctly called rupee, rupiah collapse)

"In particular, downside pressure on the rupiah could persist in the near term if we see elevated inflation prints over the next few months, and given the prospect of Fed tapering," Goldman said in a note.

Annual inflation in Indonesia, southeast Asia' biggest economy, surged to 8.61 percent in July -- its fastest pace in four-and-a-half years.

Indonesia's central bank has responded by lifting interest rates by 75 basis points this year to 6.5 percent, becoming the first Asian central bank to do so since June 2011.

(Read more: Rate hike a pre-emptive strike: Indonesian official)

But the monetary tightening appears to have done little to stem the rupiah's fall.

Goldman expects Bank Indonesia to hike interest rates in September in an attempt to prevent further declines in the currency, but says that may not be enough.

"A bigger rate hike would go further towards stabilizing the currency, but we think policymakers will continue to be restrained by the desire to prevent growth from slowing too sharply, especially since the country is approaching an election cycle," Goldman said. Parliamentary elections are set to take place in April next year with presidential elections due in June.

Going down

Goldman expects the Malaysian ringgit to weaken to 3.4 per dollar in the next three months, implying a fall of about 3 percent from current levels and compared with a previous forecast of 3.2.

Its new 12-month forecast for the Thai baht is 32 per dollar, a 4 percent downward revision from the previous forecast.

The ringgit fell to 3.31 per dollar on Thursday, its weakest level in more than three years. The Thai baht, trading at about 31.89 to the dollar, is down about 4 percent so far this year.

(Read more: Wonder why ringgit's getting crushed? Check out this chart)

Emerging Asian countries' weak current account balances will continue to weigh on their currencies as fears of the Federal Reserve unwinding its monetary stimulus highlights liquidity concerns in these markets, Goldman said.

"The market sell-off has its roots in deteriorating underlying fundamental flows, and in particular the weakening broad balance of payments led by current account deterioration in recent quarters," Goldman said.

— By's Rajeshni Naidu-Ghelani. Follow her on Twitter @RajeshniNaidu