Most Asian currencies retreat on profit taking

Most Asian currencies retreat on profit taking

SINGAPORE (Dow Jones): Profit-taking eroded a bit more of Asian currencies' recent gains on Friday, after U.S. Federal Reserve Chairman Alan Greenspan raised fears that U.S. interest rates might rise, spooking market players into covering their short dollar positions.

The won, new Taiwan dollar, Singapore dollar and the baht all ended lower in response to the position-covering as dealers closed out short U.S. dollar positions against the regional currencies, afraid their funding costs would rise.

Currencies that still offer a significant positive interest rate differential over the U.S. dollar benefited, however, with both the rupiah and the Philippine peso ending the day higher.

Sentiment toward regional currencies was also dented by the sell-off in local equities, which itself was triggered by Greenspan's warning that U.S. growth could not continue indefinitely without sparking inflation.

Fears that the Fed may raise interest rates to counter inflationary pressure set off a rush to cover short U.S. dollar positions against the regional currencies, pushing the U.S. currency higher.

"The market was very short on the dollar against Asian currencies. People really went overboard on the whole story of capital flows into local equity markets," said the head of Asian foreign exchange at one European bank in Singapore.

But although profit-taking may depress regional currencies in the immediate short term, their longer term upward trend is likely to continue uninterrupted, said the trading chief.

"I still want to be long currencies like the Philippine peso which offer some carry," he said. "It's just a question of squeezing out the weak dollar shorts before establishing new short dollar positions."

Currencies that offer positive carry -- where long positions carry a yield higher than the cost of funding short U.S. dollar positions -- did well Friday.

Heavy buying from Hong Kong banks and U.S. investment houses propelled the rupiah higher, with brokers saying that dealers were offering U.S. dollars in lots of $10 million at a time -- orders that just a few weeks earlier would have been nearly impossible to execute, because of the rupiah's illiquidity.

"It seems as if everyone is jumping into the market now," said a rupiah trader at a U.S. bank in Singapore, explaining that with one-month interest rates at 31.5 percent, the rupiah looks to many like the best buy in Asia at the moment.

"Even if the Fed does hike rates, the rupiah will still look good from a yield perspective," he said, adding that the rupiah is likely to continue its bull run over the coming week, with the U.S. dollar falling below 7,800 rupiah.

Late Friday in Asia, the U.S. dollar was quoted at Rp 7,960, down from Rp 8,082 late Thursday.

The Philippine peso also held up Friday, supported by short- term interest rates still in double figures, despite 12 successive cuts. At the close of local trading, the U.S. dollar was at 37.935 pesos, down from 38.000 at the previous close.

Lower-yielding currencies fared less well, however.

The U.S. dollar edged up to 37.0400 Thai baht, from 37.0200 baht late the day before.

Against the Singapore dollar, the U.S. currency rose to end Asian trading at S$1.7027, up from S$1.6996 at the same time Thursday.

In North Asia, the South Korean won dipped steeply, depressed by U.S. dollar-buying from the state-run Korean Development Bank.

The purchases were widely assumed to have been executed on behalf of the government, which last week unveiled a $4.6 billion program of intervention aimed at countering the won's strength in order to safeguard export competitiveness.

At the close of local trading, the U.S. dollar had been lifted to 1,202.50 won, up from 1,200 won Thursday.

The New Taiwan dollar also finished lower, as the U.S. currency rose to end the day at NT$32.762, up from NT$32.742 the previous day.