Goldman Sachs Asset Management LP boosted holdings of Malaysia's ringgit and the Philippine peso in recent weeks, betting the prospect of interest-rate increases will spur appreciation.

The ringgit will strengthen five per cent against the dollar by year-end and an 8.1 per cent gain is likely for the peso, based on estimates given by Philip Moffitt, head of Asia-Pacific fixed income at Goldman Sachs Asset, which oversees US$860 billion. Benchmark rates in Malaysia and the Philippines will increase at least 25 basis points by the end of 2014, according to the majority of economists in Bloomberg surveys.

"We expect interest rates to rise over the next year in Malaysia and the Philippines, and that's less likely in some other Southeast Asian economies such as Thailand," Sydney-based Moffitt said in an October 8 phone interview. "We'll see a bounce in the two currencies."

The ringgit has led a rebound in Southeast Asian currencies since August 31 as the Federal Reserve unexpectedly held off from reducing stimulus that fueled demand for emerging-market assets. The region's currencies all sank in the prior four months, led by an 11 per cent slide in Indonesia's rupiah, as the U.S. central bank signaled plans to rein in its $85 billion-a-month bond-buying programme.

Tapering of the programme is unlikely to start before December, and Southeast Asian assets are being boosted by Japanese demand for overseas investments, said Moffitt, who oversees Goldman Sachs Asset's unconstrained and emerging-market local-debt funds. "Liquidity generation" in the US, euro region and Japan is the highest in two years, he added.

The ringgit climbed 1.7 per cent this month to 3.2060 per dollar, the best performance among Asia's 11 most-traded currencies, according to data compiled by Bloomberg. Barclays Plc raised its three-month forecast for the ringgit by 4.5 per cent to 3.15 in September on expectations global funds will boost holdings of the nation's bonds, Hamish Pepper, its currency strategist in Singapore, said in a September 27 interview.

Bank Negara Malaysia held interest rates at three per cent at a September 5 policy meeting and warned of increased uncertainties surrounding the domestic growth and inflation outlook. Increases in consumer prices are likely to quicken as the government cuts subsidies, it said in a statement after the meeting. The last move in borrowing costs was a 25-basis-point increase in May 2011.

Prime Minister Datuk Seri Najib Razak reduced subsidies on gasoline and diesel on September 3 to rein in the government's budget shortfall. Policy makers may announce increases in flour and sugar prices this month, according to an October 6 report in the New Straits Times.

Bank of Tokyo-Mitsubishi UFJ Ltd sees a chance of a 25-basis point increase in Malaysian interest rates in the fourth quarter of 2014 "if the pare-back in subsidies is substantial enough to impinge on the consumer price index," Leong Sook Mei, the bank's Southeast Asian head of global markets research in Singapore, said in an interview yesterday. Consumer-price gains eased to 1.9 per cent in August from a 16 month-high of two per cent in July, data showed last month.

The ringgit has room to strengthen due to improving growth expectations in China in the near term and because of Bank Negara's shift to "a slight hawkish bias," Citigroup Inc strategists including Siddharth Mathur in Singapore wrote in an October 3 report. China's economy, which is second only to the US in size, has strong momentum, and imports will reach US$10 trillion in the next five years, the official Xinhua News Agency reported this week.

The peso has gained 0.7 per cent this month to 43.23 per dollar and Moffitt predicts a year-end exchange rate of 40.

The currency has climbed as President Benigno Aquino increases spending to a record in 2013 while seeking more than US$17 billion of investments in highways and airports to improve infrastructure. Gross domestic product expanded 7.5 per cent in the second quarter from a year earlier, matching China's pace. The nation is poised to be among the world's five fastest- growing economies in 2013 and 2014, according to Bloomberg surveys.

Bangko Sentral ng Pilipinas will probably keep interest rates steady this year and next, "barring any unforeseen shocks," Governor Amando Tetangco said in an October 2 interview. The central bank held its benchmark rate at a record-low 3.5 per cent for a seventh meeting on September 12.

Inflation eased to a four-year low in August, with consumer prices rising 2.1 per cent from a year earlier. The central bank aims to have consumer-price gains averaging three per cent to five per cent in 2013 and 2014.

The Philippine economy is in a better shape than most of its Asian counterparts, which should provide support for the peso, Mitul Kotecha, Hong Kong-based head of foreign exchange strategy at Credit Agricole SA, said in an October 7 interview.

Philippine GDP is forecast to increase seven per cent this year, the most since 2010, according to the median estimate of economists in a Bloomberg survey. That compares with projected growth rates of four per cent for Thailand, 4.5 per cent for Malaysia and 5.8 per cent for Indonesia, separate Bloomberg surveys show.-- Bloomberg