Interest rate rise has little impact on ASEAN monies

Interest rate rise has little impact on ASEAN monies

SINGAPORE (Dow Jones): An increase in rupiah interest rates yesterday had little impact on trading in Southeast Asian currency markets as regional currencies rose against the U.S. dollar in line with the yen during Asian hours.

Although the rupiah inched slightly higher against the U.S. currency, in line with rises in the ringgit, the Singapore dollar and the baht, traders and analysts dismissed Bank Indonesia's rate rise as ineffectual.

"It appears that Bank Indonesia is targeting a certain exchange rate for the rupiah and that it is raising interest rates to try and force the exchange rate to hit that target," said Stephanus Partono, Indonesia analyst at Goldman Sachs in Singapore.

"But there are more important issues to be addressed before the exchange rate can recover," he added, "like the private debt problem and bank restructuring. It doesn't matter how high you jack up interest rates, the rupiah will not recover while these problems linger."

In a press conference held late in the Jakarta, Bank Indonesia announced an across-the-curve increase in interest rates on Sertifikat Bank Indonesia short-term money market notes, with the benchmark one month SBI rate rising to 50 percent from 45 percent. An earlier increase four weeks ago raised the one month rate to 45 percent from 22 percent.

According to Indonesian finance minister Fuad Bawazier, the interest rate increase was aimed at stabilizing and strengthening the rupiah. Most market participants, however, ridiculed the notion that the government could attain its declared exchange rate target of 6,000 rupiah to the U.S. dollar simply by raising interest rates.

Even if Bank Indonesia hikes rates to 100 percent, the rupiah will not rally to 6,000 rupiah," said one economist at a European bank in Singapore.

Market reaction to the news was muted, with the rupiah rallying briefly on the announcement, with the dollar dropping to an intraday low of 7,775 rupiah. The U.S. currency recovered within the hour, however, before settling to finish Asian trading at 7,825 rupiah, down from 8,025 rupiah late on Monday.

After the central bank had announced earlier Tuesday that it was to hold a press conference to address the "weekly publishing of key monetary data as well as fulfilling the IMF's performance criteria," an interest rate rise had been widely expected.

With low rates on tomorrow/next U.S. dollar/rupiah swaps indicating plentiful rupiah liquidity in the offshore market -- tom/next rates were at par immediately before the SBI rate rise, say traders -- market participants were prepared for the increase.

"In any case most people aren't interested in trading the rupiah because of the credit concerns. SBI rates simply aren't a valid tool for manipulating the exchange rate," said the managing director of foreign exchange at one U.S. bank in Singapore.

With few developments to provide direction to trading, other regional currencies inched higher against the U.S. dollar in line with the yen.

Late in the Asian day, the U.S. dollar was trading at 3.7374 ringgit (MYR), down from 3.7925 late the previous day.

Wary of Bank Negara, which on Monday was seen offering to sell U.S. dollars at 3.80, and lacking immediate reasons to buy U.S. dollars, traders bought ringgit to exit liquidate outstanding long positions in U.S. dollars, said market participants.

Overall sentiment towards Malaysia remains negative, however, with the market only awaiting a trigger, such as a new batch of corporate insolvencies, to sell the ringgit down once again, say traders.

The Singapore dollar also rose on Tuesday, with the U.S. dollar falling back to S$1.5922 in late Asian trading, down from S$1.6009 late on Monday.

The Thai baht ended higher, too, as market participants bought the local currency in an attempt to front-run demand for baht resulting from the forthcoming US$1 billion recapitalization of Bangkok Bank PCL (H.BBK).

In London, the U.S. dollar fell yesterday against most other major currencies in early European trading. Gold prices also were lower.

Dollar rates compared with late Monday included: 1.7924 German marks, down from 1.8037; 131.48 Japanese yen, down from 132.08; 1.4895 Swiss francs, down from 1.4948; 6.0085 French francs, down from 6.0457; 2.0184 Dutch guilders, down from 2.0314; 1,772.03 Italian lire, down from 1.783.00, and 1.4292 Canadian dollars, up from 1.4282.

The British pound was quoted at US$1.6772, down from $1.6791.