Most Southeast Asian currencies slump

Most Southeast Asian currencies slump

SINGAPORE (Dow Jones): Just one week ago, excessively strong currencies may have seemed the last problem likely to afflict Southeast Asia.

But as regional markets ended Asian trading hours on Friday mostly down on the day, but all stronger than a week previously, analysts warned that further appreciation may prove damaging to Asia's fragile economies.

Although the Singapore dollar, the baht and the rupiah all slipped back from levels seen on Thursday at the height of the week's yen rebound, currencies throughout the region ended the session uniformly higher than at the end of the previous week's trading.

Among other Asian currencies, the Philippine peso, the new Taiwan dollar and the won all continued their bull run, ending Friday higher against the U.S. dollar, lifted by the buoyancy of the yen.

Despite the explosive speed of the regional rebound - generally attributed to U.S. dollar sales by hedge funds forced to unwind positions as banks trim credit lines - some analysts caution that there may be more appreciation to come.

"People are getting out of positions in a very illiquid market," explained Clifford Tan, foreign exchange and interest rate strategist at Warburg Dillon Read in Singapore.

"Given the global environment of deleveraging, the unwinding may go on for a long time - potentially another month or so," he said.

Should the yen rally further, says Tan, the more sensitive of the Asian regional currencies - the won, the new Taiwan dollar and the Singapore dollar - will also tend to strengthen, in turn exerting upward pressure on the baht, peso and rupiah.

But strong currencies are the last thing Asia's battered economies need at this point, according to many analysts.

"Asian governments cannot afford stronger regional currencies," warns Chua Soon Hock, chief strategist at Sanwa Bank in Singapore. He argues that further appreciation will undermine export competitiveness, dashing hopes of an export-led recovery in the region.

"If regional currencies strengthen further from here, policymakers should quickly lower interest rates to maintain exchange rate stability," he said.

Other analysts back this view, noting that monetary authorities in South Korea and Thailand have acted aggressively to reduce interest rates. The Monetary Authority of Singapore, meanwhile, is widely believed by traders to have bought U.S. dollars in volume over the last week in order to check the rise of the local currency.

"The MAS has been on the bid at every level, all the way down from S$1.67," said a Singapore dollar trader at a U.S. bank in the island republic.

As Asian trading hours drew to a close on Friday, the U.S. dollar was quoted at S$1.6491, a touch stronger than S$1.6344 late on Thursday, but down steeply from S$1.6885 a week ago.

With domestic Indonesian banks now stopped out of their long U.S. dollar positions by the rupiah's rally, the U.S. currency is likely to push a little higher in the coming week, settling at 10,000 to 10,500, according to the Jakarta-based trader.

The baht also settled a little lower on Friday, with the U.S. currency ending the day at 38.5850 baht, compared with 38.4000 the day before.

In recent days the pace of long U.S. dollar position liquidation has slackened, according to traders, leading some to believe that the hedge funds by now have largely unwound their short baht positions.

If that is the case, they say, the Thai currency is likely to steady around current levels, weakening a touch if the Bank of Thailand further eases monetary policy.

In trading on the Philippine Dealing System, the peso continued to benefit from the yen's strength through Friday's session. At the close, the U.S. dollar was quoted at 43.250 peso, down from 43.385 the day before.

In North Asian markets, both the New Taiwan dollar and the South Korean won also strengthened.

Against the Taiwan currency, the U.S. dollar closed at a six- month low of NT$32.823, down from NT$32.967 the previous day.

Against the won, the U.S. currency ended at 1,331, down sharply from 1,360.