Regional currencies bank in trouble

Regional currencies bank in trouble

SINGAPORE (Dow Jones): Fresh fears that China may devalue the yuan sparked a renewed sell-off in Southeast Asian currencies on Monday, pushing both the Singapore dollar and the Indonesian rupiah to their lowest levels against the U.S. dollar since early October.

North Asian currencies, too, were hit hard, as foreign exchange traders rushed to buy U.S. dollars in reaction to an article in Sunday's China Daily newspaper that appeared to favor devaluation. As the Taipei stock market slid by 3 percent, the new Taiwan dollar dropped to its lowest level in over six weeks.

Although a chorus of analysts, backed up by at least one senior Chinese official, dismissed as baseless market worries that Brazil's recent flotation of the real may force the People's Republic to devalue its currency in the near future, their reassurances came too late to prevent sharp falls in Asian regional currencies early in the trading day.

"All this talk that contagion from Brazil may have an effect on the yuan is a load of rubbish," declared Chua Soon Hock, chief strategist at Sanwa Bank in Singapore, echoing the prevalent opinion among Asian economists.

Unlike the real, they point out, the yuan is not freely convertible on the capital account, a restriction which gives the Chinese government nearly total control of the yuan exchange rate.

Although, like other Asian countries, China is suffering economically, $145 billion in foreign exchange reserves and a trade surplus of $44 billion mean the Beijing government is under little immediate pressure to realign its informal peg to the U.S. dollar.

That association led foreign exchange traders throughout Asia to buy U.S. dollars as trading got under way early on Monday morning.

As sentiment toward Asia turned bearish, the U.S. dollar rose to an intraday high of S$1.6900 against the Singapore dollar. Although the U.S. currency slipped back slightly later to end local interbank trading at S$1.6880, it was still well up from its level of S$1.6745 late on Friday in Asia.

Against the rupiah, the U.S. currency rose to hit a high of Rp 9,400, up from Rp 8,920 late on Friday.

The U.S. dollar also ended up against the Thai baht. Although the U.S. currency finished Asian interbank trading down from its earlier high of 37.1000 baht, at 36.9250 it was still up from Friday's close at 36.7500.

The U.S. dollar also finished higher against the Philippine peso. At the close of domestic trading, the U.S. currency ended at 38.78 pesos, up from 38.68 at Friday's close.

Although analysts recognized that sentiment towards Asian currencies has taken a turn for the worse, they stress that any renewed depreciation will be far milder than that seen in the second half of 1997 and the first half of 1998.

In contrast to 1997, when the economic crisis first erupted in Asia, regional currencies are now cushioned by sizable current account surpluses, while their underlying economies are far less dependent on volatile short-term capital flows for their funding needs.

In north Asian markets, the continent-wide U.S. dollar buying spree pushed the new Taiwan dollar to its lowest level in six weeks in early trading. After hitting a high of NT$32.368, however, the U.S. dollar sank back a touch on central bank selling to finish the day at NT$32.349, up from Friday's close at NT$32.297.

Against the South Korean won, the U.S. dollar also weakened from its early high, as local corporations took the dollar's strength as a selling opportunity. At the close of local dealing the U.S. currency was at 1,180 won, flat compared with Friday's level.