July 22 (Bloomberg) -- The South Korean won and Taiwan dollar will rise the most in Asia after China ended its decade- old peg to the dollar to let it fluctuate versus a basket of currencies, strategists at banks including Bank of America Corp. and JPMorgan Chase & Co. said.

The region's central banks may be more tolerant of stronger currencies after the Chinese central bank said the new yuan rate strengthens the currency by 2.1 percent to 8.11 per dollar immediately. The bank said it will continue to keep a trading band of 0.3 percent. A higher yuan will increase the buying power of companies in the world's fastest-growing major economy and make their exports more expensive compared with regional rivals.

China bought 37 percent of Taiwan's total exports in 2004 and a fifth of Korea's shipments, making it their biggest overseas market. Exports account for almost 40 percent of Korea's economy and about half of Taiwan's gross domestic product.

``Korean authorities will have a hard time preventing the won from rising,'' said Uwe Parpart, senior market strategist in Hong Kong at Bank of America Corp. ``If the yuan goes up, there will be appreciation pressure on the yen, which puts immediate appreciation pressure on the won. The Taiwan dollar will also strengthen because of the close integration of its economy with that of China.''

South Korea's won rose 0.7 percent yesterday to 1,035.50 against the dollar at the 3 p.m. close of onshore trading, according to Seoul Money Brokerage Services Ltd. The Taiwan dollar gained 0.2 percent to NT$31.953 against its U.S. counterpart, according to Taipei Forex Inc. The onshore markets of these currencies were closed when China made the peg announcement.

Regime Change

The shift in China's currency regime sent the yen up to as high as 110.17 per dollar. The Singapore dollar jumped as much as 2.1 percent to S$1.6496 from late yesterday in Asia and the Thai baht climbed 2.3 percent to 41.16.

``The Asian currencies will react very positively to this,'' said Frank Gong, chief China economist at JPMorgan Chase & Co. ``Asian currencies will be moving basically because the 2 percent is not enough for the yuan. The market will have to price in more appreciation down the road.''

Forward contracts before the announcement had shown that traders bet the yuan would probably rise 5.7 percent to 7.8015 against the dollar in a year if freely traded. The contracts allow investors to wager on the value of a currency that is not fully convertible or hedge investments that are denominated in it.

`Controlled Move'

China should conduct ``a controlled move that would give the currency more flexibility,'' Rodrigo de Rato, the International Monetary Fund's managing director, said June 20. ``We are advocating it move in a step-by-step manner.''

Raghuram Rajan, chief economist for the Fund, said on April 13 that ``a lot of Asia will follow the Chinese lead if, in fact, there's more flexibility.''

Japan sold a record annual 32.9 trillion yen ($297 billion) during the year that ended March 31, 2004, to stem gains in its currency, according to the data from the Ministry of Finance in Tokyo. It has refrained from selling since.

The Bank of Korea on Dec. 2 said it bought dollars to stem the won's ascent, helping push up foreign-exchange reserves to $192.6 billion in November. The nation's reserves, the world's fourth largest, rose to $205 billion by the end of June, suggesting it is still buying dollars.

`More Space'

``A gain in the Chinese currency means other Asian central banks can allow a certain level of increase in their own,'' Osamu Takashima, chief analyst in Tokyo at Bank of Tokyo-Mitsubishi Ltd., a unit of Japan's second-biggest lender, said before the China's announcement. ``A stronger yuan reduces China's export competitiveness and, in that perspective, means there's more space for the won, for instance, to appreciate.''

The U.S. dollar needs to drop 15 percent, the Institute for International Economics said on Nov. 30. ``Most of this further adjustment should take place against Asian currencies, which will require China to revalue its exchange rate against the dollar by about 20 percent,'' the Washington-based policy group said.

Asian central banks may still need to try to avoid moves that they think are ``rapid,'' said Tetsuo Yoshikoshi, market analyst of the treasury unit in Singapore at Sumitomo Mitsui Banking Corp., a branch of Japan's third-biggest lender.

``They may have no choice but to come into the market to sell their currencies as the move would be pretty big,'' Yoshikoshi said. ``Some currencies already appreciated quite a lot and there's already speculation that Singapore's monetary authority sold its currency.''

`Necessary Steps'

The Bank of Korea said it will act to curb speculative currency trading if the won surges.

``If the won appreciates faster than expected, then the Bank of Korea will take necessary steps to stabilize the exchange rate,'' Rhee Gwang Ju, director general at the bank's international department, said in a telephone interview. ``Loosening the yuan will have a minimal or almost no impact on the Korean won and Korea's exchange-rate policies.''

A 10 percent appreciation in the yuan would probably lead to a $2.4 billion increase in South Korea's exports and a $400 million gain in imports, assuming the won doesn't rise, the Bank of Korea said in a report on May 22. That would add $2 billion a year to the nation's trade surplus, it said.

The Taiwan dollar won't strengthen with any rise in the yuan, the island's Economic Daily News reported on April 23, citing central bank officials it didn't name.

Ringgit

Malaysia also changed its fixed exchange rate policy by scrapping its peg to the dollar and adopting a managed float system for the first time in almost seven years.

``The ringgit will be allowed to operate in a managed float, with its value being determined by economic fundamentals,'' the central bank said today on its Web site. ``Bank Negara will monitor the exchange rate against a currency basket to ensure it remains close to fair value.''

It didn't say at what level the ringgit will trade.

China's easing of the peg ``will have the most significant impact on Korea and Taiwan,'' said Craig Chan, Royal Bank of Scotland's Hong Kong-based strategist. ``And the ringgit will impact the Singapore dollar, and the Singapore dollar the Thai baht. It's a chain reaction.''

To contact the reporter of this story: Yumi Kuramitsu in Hong Kong ykuramitsu@bloomberg.net

Last Updated: July 21, 2005 11:12 EDT