IF indeed, as many people believe, slowing economic growth has become a bigger global risk than inflation, then Asia should relax its grip on its currencies and use their weakening to shore up sagging exports.

That means currencies such as the South Korean won and Malaysian ringgit should fall further, egged on additionally by the US dollar's sharp rally in the past two weeks.

But not all investors are buying into this idea yet, simply because it relies on too many assumptions.

Nothing is certain, apart from the drop in Asia's exports, borne out by flagging factory output and rising inventories.

Oil prices are 23 per cent off their record high, yet analysts are wary of calling a peak.

Back home, inflation is still hitting multi-year highs in India, Malaysia and other parts of Asia.

No one is sure the US dollar will continue rising in the face of incessant downbeat news from financial markets.

'Those countries with a focus on inflation-fighting will, for the time being, be relatively aggressive and prevent their currencies from depreciating', said Mr Simon Flint, a strategist at Lehman Brothers.

The evidence so far suggests that, on balance, Asian monetary policy is still tilted towards preventing or at least slowing currency depreciation.

The Bank of Korea, by far the most aggressive, sold about US$15 billion (S$21.1 billion) in July to stop the won from falling past 1,050 a dollar.

Indonesia has spent dollar reserves to keep the rupiah between 9,050 and 9,250 against the dollar since June.

Even during the US dollar's broad rally since mid July ? it is up 7 per cent against a basket of major currencies ? central banks in Asia have ensured their currencies have not fallen as far as the euro or yen.

For instance, 9.5 won buys one yen now, against 9.6 a month ago.

The Singapore dollar has not moved against the yen since mid-July and has gained 2 per cent against the Japanese currency in the past 3 months despite a near 4 per cent fall against the US dollar in the same period.

Will the central banks step back now that exports are weaker, so that manufacturers can use currency weakness as an offset?

'If policy makers are really defocusing on inflation and looking more at growth, that may on balance lead them to intervene less aggressively than they had before', said Mr Daniel Hui, a strategist at HSBC.

That is far from clear right now.

Slamming the brakes
On the one hand, a recession in Europe or Japan would imply further weakness in the technology exports that much of Asia thrives on.

Taiwan has posted its first trade deficit in two years while exports from China, the region's giant re-export centre, have slowed.

Asia's most open economies, Singapore and Hong Kong, contracted in the second quarter of 2008 as their exports fell.

At the same time, there is no sign the pressure on consumer prices in a region that is a heavy importer of fuel has abated.

Inflation in India is at a 13-year high, Singapore's is at a 26-year high, and Malaysia's at a 27-year peak.

Understandably, economists foresee South Korea, where import prices in won terms climbed 50.6 per cent in July, continuing to thwart the won's decline.

'If they need to relax their hold on intervention, they have to see confirmation of the decline in oil prices and other commodities having an impact on inflation,' said Westpac Bank strategist Sean Callow.

Westpac sees the won rallying to 1003, up 4 per cent from Wednesday's levels. It also expects the dollar rally will fizzle out by the fourth quarter.

Most analysts also concur that Indonesia will be loath to let its currency weaken.

'They have a significant inflation problem, sufficient comfort with their growth outlook and enough reserves to intervene', said Lehman's Flint.

Meanwhile, Asia's defence of its currencies is set to get harder. Slowing exports, widening current account deficits and a rising dollar pose one challenge.

The other risk is from loose domestic policies as governments oppose rate rises to appease businesses, while some, such as Indonesia and India, throw money at populist projects ahead of elections next year.

HSBC reckons investors may flock to Asian fixed income markets, but capital will stay away from risky assets such as equity, credit and other investments.

'The drivers of Asian currencies may change, but the pressure for depreciation in a range of jurisdictions will persist,' HSBC said in a note.

The bank is bearish on most Asian currencies, with the exception of the Chinese yuan whose pace of appreciation they expect will moderate. -- REUTERS