Regional monies up on U.S. rate cut hope

Regional monies up on U.S. rate cut hope

SINGAPORE (Dow Jones): Mounting conviction that the U.S. Federal Reserve will cut interest rates in the coming week triggered a surge in Southeast Asian currencies Friday, with most traders and analysts predicting fresh gains when trading reopens Monday.

The baht led the rush, soaring to its highest level in four months, as regional currencies across Asia rallied against the U.S. dollar. Although afternoon trading saw the Thai currency surrender some of its earlier gains, market participants didn't hesitate to forecast further appreciation over the coming week.

"The prospect of a cut in U.S. interest rates is causing the regional currencies to surge," said Prasenjit Basu, regional economist at Credit Suisse First Boston in Singapore. "Until a week ago, a 25-basis-point cut (in the fed funds target rate) has the most any one dared hope for. Now people are talking about a 50-basis-point cut, which would be bullish for Asian currencies in the near term."

In recent days, market players have come around to the view that the policy-setting Federal Open Market Committee will vote to trim up to half a percentage point off U.S.-dollar interest rates when it meets Tuesday. In response, they have dumped the U.S. currency in the regional foreign-exchange markets, driving Asian currencies sharply higher.

Although analysts are divided on exactly how high Southeast Asian currencies would climb in response to a Fed easing, one thing is clear: if the Fed doesn't now move on rates, regional currencies will tumble.

"If the Fed does not cut rates, there will be tremendous disappointment in the emerging markets. A cut of 50 basis points is necessary to sustain confidence," said an analyst at Merrill Lynch.

As trading wound down late Friday, however, market sentiment remained bullish on the regional currencies.

"We are seeing genuine investment inflows from offshore," said a baht-trader at a Thai bank, explaining the baht's upsurge during Asian trading Friday.

Baht-buying ahead of the Bank of Thailand's 14 billion baht local-currency bond issue pushed the baht higher in early trading. And when the central bank defied market expectations by not intervening to suppress the rising local currency, the dollar's retreat rapidly turned into a rout.

As the dollar fell below 39.80 baht, it triggered a raft of stop-loss orders, setting off a frenzied round of U.S. dollar sales as hedge funds bailed out of their long positions in the U.S. currency.

After the dollar fell to a low of 38.50 baht, its lowest level against the Thai currency since mid-May, moderate buying interest emerged, lifting the U.S. currency off its bottom.

By the end of Asian trading, the dollar had recovered to 39.4500 baht, although at that level it was well below Thursday's close of 39.8250 baht.

Other Southeast Asian currencies also strengthened on Friday, with the Singapore dollar rising on what traders said was short- position covering by hedge funds.

Late in Asia, the U.S. dollar was quoted at S$1.7113, down from S$1.7220 at the same time Thursday. Should the Fed go ahead and cut rates, the U.S. currency could well fall below the psychologically important S$1.70 level in the coming week.

The U.S. dollar also eased against the Philippine peso, ending domestic trading at 43.76 peso, down from 43.86 peso at the previous close.

In North Asia, meanwhile, both the Korean won and the New Taiwan dollar strengthened against the U.S. currency. At the close of trading in Seoul, the U.S. dollar was quoted at 1,387 won, down from 1,392 won the day before.

Against the New Taiwan dollar, the U.S. currency slipped to NT$34.545, as the Taiwanese sold $100 million to meet strong demand from importers, according to traders. At the previous day's close, the U.S. dollar was quoted at NT$34.578.

Against the Indonesian rupiah, however, the U.S. dollar ended unchanged, at 10,900 in late Asian trading.