Most currencies in SE Asia gain footing

Most currencies in SE Asia gain footing

SINGAPORE (Dow Jones): Market speculation that Indonesia was
on the verge of following Malaysia and introducing capital
controls boosted the rupiah during Asian trading hours on
Tuesday.

Unconvinced by denials from President B.J. Habibie and Bank
Indonesia Governor Sjahril Sabirin, market participants bought
rupiah to close out short positions rather than run the risk of
getting caught out by an unexpected announcement.

Other Southeast Asian currencies, including the Singapore
dollar, the baht and the Philippine peso also strengthened.
Meanwhile, in North Asia, the won finished higher, but only after
souring sentiment toward South Korea's economic reform process
sent the won crashing in earlier trading to its lowest level
since June.

With Japanese markets closed for a public holiday, and the yen
drifting sideways for much of the Asian session, currency traders
were thrown back on their own resources when searching for
direction in regional foreign exchange markets.

With little else to focus on, traders in Southeast Asia seized
on talk that Indonesia was planning to implement capital controls
as reason to buy the rupiah against the U.S. dollar.

Although the rumors were denied by both Indonesia's president
and central bank governor, few traders were prepared to run the
risk of an unexpected announcement catching them holding
outstanding rupiah exposure that they would then be unable to
cover.

Asked whether Indonesia was contemplating the introduction of
capital controls, Habibie told Dow Jones Newswires: "No, that's
for sure, as long as I'm here, no."

The Indonesian president also stressed that the government
will not act to set the level of the rupiah.

Nevertheless, some observers argue that the idea of imposing
capital controls, as Malaysia did two weeks previously, will
remain attractive to other Asian governments.

"Capital controls may be effective in Indonesia, given the
economy's current isolation and the fact that the IMF's
(International Monetary Fund) measures clearly are not working,
but only prolonging the pain," said Chua Soon Hock, chief
strategist at Sanwa bank in Singapore.

Other analysts, while conceding that there are arguments in
favor of implementing capital controls, were less enthusiastic.

"There is a case for managing short-term capital inflows,"
said Paul Alapat, senior economist at Credit Agricole Indosuez in
Singapore. Short-term interest rates of around 70 percent,
although necessary to hold inflation in check, are attracting
potentially destabilizing flows of "hot money" into the rupiah,
explained Alapat.

"Those inflows will reverse abruptly at the first sign of any
political instability, with a disastrous effect on the rupiah
exchange rate," he said.

Imposing capital controls now, however, would probably do more
harm than good, Alapat argued. Not only would restrictions
jeopardize sorely needed IMF funding, but they would deter
Indonesian investors from repatriating the vast quantities of
capital that left the country earlier this year.

By late Asian trading, a combination of short covering and
rupiah buying to front run inflows of IMF funds had pushed the
U.S. dollar down to 10,825, from 11,500 the day before.

Among other Southeast Asian currencies, the Singapore dollar
rallied against the U.S. dollar in line with the rupiah, its rise
boosted by short-covering by a U.S. investment bank, according to
traders.

Late in Asian trading the U.S,. currency was quoted at
S$1.7250, down from S$1.7330 late on Monday.

The baht also ended higher, although the Thai currency
remained bounded within a tight range, exciting little interest
among offshore traders.

Late in the day, the U.S. dollar was at 40.7600 baht, down a
touch from 40.7750 late on Monday.

On the Philippine Dealing System, the U.S. dollar ended the
session at 43.67 pesos, compared with 43.71 at Monday's close.

In North Asian markets, the won stole the limelight, as the
U.S. dollar rose sharply in early trading, briefly breaching the
key psychological barrier at 1,400 won, before profit-taking set
in, pushing the U.S. currency lower once again.

The won's rally from its intraday low was assisted by a verbal
intervention by the Ministry of Finance and Economy, which
cautioned traders against pushing the dollar too high too
quickly.

By the close of domestic trading the U.S. currency had
retreated to 1,382 won, below Monday's close of 1,388.

"There are certainly signals of weakness in the won," said
Dong Tao, senior economist at CS First Boston in Hong Kong. Not
only are debt repayments sapping the won, but a slow down in
capital inflows and export revenues also argue for weakness, he
said.

Nevertheless, South Korea's current account should remain in
surplus, which will help to support the local currency, Tao
argued.

"A lot of the won's current weakness is correcting its earlier
overshoot to levels around 1,250 won (to the U.S. dollar). We are
simply seeing the won move back into fair value somewhere between
1,340 to 1,400," he said.