Central banks, hedge funds to stem rising Asian currencies
Central banks, hedge funds to stem rising Asian currencies
SINGAPORE (AFP): Asia's rising currencies are expected to consolidate the coming week with central banks seeking to cap their upside and hedge funds betting the regional units will fall, dealers and analysts say.
Most of the regional currencies, except notably for the Singapore dollar, had appreciated on the back of a robust yen last week, when at least two central banks were reportedly in the market selling their own currencies.
"We can expect regional currencies to weaken this week," said Andy Tan, general manager of U.S. research house Standard and Poor's MMS in Singapore.
Tan said talk was that hedge funds had quietly taken positions against regional currencies to capitalize on the flush liquidity in the market.
"They are probably expecting that Asian currencies have some room to fall," he said. "This is among the market concerns the coming week."
Dealers say among the currencies linked to the hedge funds are the Singapore dollar, Thai baht, the Australian dollar and the Hong Kong dollar.
Hedge funds were blamed for the Asian currency crisis that broke out in mid-1997 and lead to financial turmoil and slammed the brakes on the region's rapid economic growth.
Tan said foreign exchange markets would closely monitor a meeting of the Basle-based Bank of International Settlements (BIS), the central bank of central banks, in Hong Kong on Monday.
Jacqueline Ong, regional economist with British financial house IDEA here, said the market tendency should remain to sell the U.S. dollar as it rallies but she added that the downside for the greenback seemed to be heavily protected around 110 against the yen.
"The market is pretty fearful that beyond that there could be BoJ (Bank of Japan, the central bank) intervention," she said.
The yen, which has surged nearly 35 percent against the U.S. dollar over the past five months, closed at 110.98 against the greenback in New York on Friday, sharply higher than the previous week's close of 113.52.
"Given that scenario, the upside for regionals is controlled at present except for the likes of the Philippine peso and the South Korean won which have an upside scope," Ong said.
Desmond Supple, Singapore-based head of research for Asian currencies at Barclays Bank, said Asian central banks were expected to cap the strength of their currencies over the coming weeks.
"Rising foreign exchange reserves as a result of intervention will help counteract the loss of reserves when many Asian countries begin to repay IMF loans," he said.
Loans borrowed from the International Monetary Fund (IMF) were based on U.S. dollars, which the central banks would mop up from the market through intervention by selling their own currencies and hence weakening them, dealers say.
The Singapore dollar closed Friday at 1.6724 from its previous week's 1.6600, the peso at 38.04 from 39.14, the Thai baht at 36.25 from 36.75, the Taiwan dollar at 32.158 from 32.215, the won at 1,175 from 1,191.5 and the Indonesian rupiah at 8,000 from 7,950.
Supple said that apart from the strong yen, another factor supporting regional currencies at present was the market's tendency to price-in a sustained economic recovery for the recession-hit region and associated near-term upgrading of some countries' ratings towards investment grade.
This followed continued signs the region's real output was recovering, and the foreign exchange reserves were rising to moderate previous sovereign risk concerns, he said.
"However, while we expect the market to continue to focus on favorable headline numbers over the short-term, and while the rally created by lower (interest) rates and a stronger yen discourages closer inspection of economic fundamentals, we remain very wary," Supple said.