May 22 (Bloomberg) -- Asian central banks will temper gains in their currencies and boost foreign-exchange reserves until more convincing signs of a global recovery emerge, according to HSBC Holdings Plc.

The Bloomberg-JPMorgan Asia Dollar Index, which tracks the 10 most-active regional currencies against the greenback, is set to post a third monthly gain, threatening to prolong a collapse in exports caused by falling consumer spending.

“We are broadly bearish Asian currencies against the dollar,” Daniel Hui, a Hong Kong-based foreign-exchange strategist at Europe’s largest bank, said in a phone interview. “Part of this view is based on what we observe in terms of central bank policy -- they will resist any strengthening of their currencies.”

Asian central banks are mopping up U.S. dollars as improving risk appetite, narrowing bond spreads, and an increase in dollar liquidity attracts overseas funds to emerging-market assets, Hui and co-strategist Perry Kojodjojo wrote in a research note published today.

The inflows prompted regional central banks, except Singapore and Malaysia, to intervene in foreign-exchange markets in April, the report said.

Depleted Reserves

Emerging-market equity funds, led by China, Brazil, India and Taiwan, attracted most of the cash that investors have been pulling from money-market funds as they seek higher yields, EPFR Global said.

The funds lured a total of $21 billion in the past 11 weeks as stocks rallied, while Europe, Japan and the U.S. saw combined outflows of $14.1 billion, EPFR, the Cambridge, Massachusetts- based research firm said in an e-mailed statement yesterday. Asia ex-Japan received $933 million in the week ended May 20, the most among emerging-market stock funds, bringing the total this year to $6.9 billion.

The collapse of Lehman Brothers Holdings Inc. in September that caused a global credit freeze and intensified the world recession, prompted monetary authorities to defend their currencies. Asian central banks, excluding China, have run down their foreign-exchange reserves by more than $300 billion in the last 12 months, according to HSBC’s report.

“Central banks will likely be keen to rebuild this buffer,” HSBC said. “And until the signs of global economic recovery become more convincing, central banks will unlikely tolerate significant currency appreciation.”

‘Most Aggressive’

Central banks intervene by arranging purchases or sales of foreign exchange. China, Singapore, Taiwan, Japan and South Korea have all witnessed an unprecedented slump in overseas shipments this year, with currency gains reducing exporters’ earnings in local terms.

“The big picture is that the likelihood of interventions depends on the value of the dollar in global markets, and I do not expect it to fall much further,” said Dariusz Kowalczyk, chief investment strategist at SJS Markets Ltd. in Hong Kong. “Gains in Asian currencies may peter out on their own.”

The Bank of Korea probably bought $2.2 billion in April, the first month of dollar purchases since December 2007 and the largest since December 2006, Hui and Kojodjojo wrote in the report. HSBC says its Asian Intervention Dashboard provides “refined estimates” of intervention, its cost, and the sustainability of the overall currency policy regime.

Bank of Korea said in a statement today that this figure was “not true,” without giving further information. Hui said in response that he wasn’t immediately able to comment further.

Bank Indonesia also bought the currency for a second month, while the Central Bank of the Republic of China (Taiwan)’s dollar-buying was Asia’s “most aggressive,” the strategists said.

‘Increasing Pressure’

Singapore was a notable net seller of U.S. dollars in April as policy makers sought to keep the city-state’s currency within its trading band. The monetary authority said there was “no reason for any undue weakening” in the local currency following its semi-annual policy review on April 14.

Bank Negara Malaysia sold $749 million in April, compared with $3.6 billion in March because it may be targeting some stability in the ringgit’s value against the Singapore dollar, according to HSBC estimates.

While Malaysia’s reserves remain adequate and comfortable, “Bank Negara may face increasing pressure” to follow other Asian central banks in buying dollars, and “thus change policy tack to see some more depreciation” in the ringgit, HSBC said.

To contact the reporter on this story: Lilian Karunungan in Singapore at lkarunungan@bloomberg.net; David Yong in Singapore at dyong@bloomberg.net.

Last Updated: May 22, 2009 06:46 EDT