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.