RI currency board plan drives Asian currencies

RI currency board plan drives Asian currencies

SINGAPORE (Reuters): Asian currencies recovered some lost ground late yesterday as traders hedged their bets on signs Indonesia would go ahead with a currency board system to stabilize its rupiah despite mounting criticism of the plan.

Dealers said the rupiah jumped on comments by U.S. economist and advocate of the system, Steve Hanke, who said Indonesian President Soeharto shared his view that setting up a currency board was the least risky option.

Soeharto's judgement was that the risk of installing a currency board was "tiny", Hanke said after a meeting with the Indonesian leader in Jakarta.

The rupiah had earlier slumped through the 9,000 level to the dollar as traders grew concerned that their doubts about the proposal would prove justified.

U.S. Treasury Secretary Robert Rubin repeated his reservations over the plan overnight and even the International Monetary Fund (IMF), which has so far avoided public comment, joined the growing chorus of dissent.

"We have concluded that a lot of options need to be in place before a currency board would make sense," IMF First Deputy Managing Director Stanley Fischer said in Washington.

Dealers said the rupiah was likely to run up against a wall of dollar demand near the 7,000 level despite expectations that it would be pegged at 5,000-6,000 to the dollar under the proposed fixed rate regime.

"The market is very thin and nervous at the moment. I have a feeling they'll go ahead with it (the currency board) and then the dollar will go higher," a dealer in Singapore said.

"To peg it at 5,000-6,000 is totally out of line with the fundamentals, the political situation. I can't see how they can maintain the peg at that level," he added.

Signs that Research and Technology Minister Jusuf Habibie may be Indonesia's new vice-president and a potential successor to Soeharto continued to depress the market, analysts said.

"The market does not take Habibie well. When there were rumors that he'd be vice-president previously, the rupiah dropped immediately," a U.S. bank dealer said.

"Now it seems quite certain that he will be and that's just a recipe for disaster," she added.

Indonesia's ruling Golkar party named House Speaker Harmoko and Habibie as vice-presidential candidates on Thursday ahead of the March presidential election.

Elsewhere, the Malaysian ringgit bounced back from a low of 4.00 to the dollar as interbank players and foreign funds booked profits on the dollar's sharp rise earlier. Dealers said it was likely to trade in a 3.60-4.00 range for the time being.

The Singapore dollar recovered after finding little reason to stay below the 1.67 level to the U.S. dollar.

"When dollar/Sing went above 1.67, the central bank was in the deposit market, squeezing up interest rates to prevent the Singapore dollar from weakening too much," a dealer said.

The Thai baht recovered from its lows with other Asian currencies, helped by positive domestic developments.

Finance Minister Tarrin Nimmanahaeminda said he expected any partial Japanese bank recall of loans to Thai debtors ahead of corporate book closings in March to have limited impact on the baht as the market was fully aware of it.

News the IMF had decided to relax its fiscal target for Thailand, allowing a fiscal 1998 budget deficit equivalent to one to two percent of gross domestic product, had already been widely discounted and barely produced a twitch.

Deputy Prime Minister Supachai Panitchpakdi said the IMF easing of Thailand's budgetary surplus requirement would help prevent the economy from contracting this year.

IMF Asia-Pacific director Hubert Neiss said new terms governing Thailand's $17.2 billion IMF-led aid package would be sent to the fund's board for approval by March.

The Philippine peso ended down but off its lows as importers held back from buying dollars on expectations the peso would strengthen again.

The Taiwan dollar finished above T$33 to the U.S. dollar, boosted by the recovery in Southeast Asian currencies and foreign fund flows to the bullish stock market.

Foreign funds had a net inflow of US$692 million during February 1-9, compared with a net outflow of US$85 million for the whole of January, the central bank said earlier this week.

The Hong Kong dollar softened and forwards extended their gains on expectations of higher local interest rates in the wake of growing uncertainty in Asia.

The South Korean won ended fractionally higher in slow trade as traders remained cautious despite the cancellation of a trades union strike.