Speculators hit as central banks wage war

Speculators hit as central banks wage war

SINGAPORE (Reuter): Central banks appeared to have gained the
upper hand in Southeast Asia's currency war yesterday as
speculators who had sold regional currencies aggressively found
themselves deprived of short-term funds.

Dealers and economists said the speculators had lost huge sums
of money. "It's a bloodbath," said one.

The Malaysian ringgit and Indonesian rupiah jumped sharply in
early trade on rumors that Malaysia's central bank had blocked
access to the local swap market, effectively removing a means of
short-term funding to cover speculative positions.

Dealers said Bank Negara Malaysia appeared to have asked local
banks to stop lending money to foreign borrowers for up to two
days at a time, as the Thai central bank did on Thursday in a
move to squeeze speculators out of the market.

The talk triggered fears the Indonesian authorities would
follow suit, pushing the ringgit and rupiah to lows of 2.4735 and
2,413.00 respectively against the dollar, as players sold their
dollar holdings in the spot market to obtain funds.

The Malaysian and Indonesian central banks denied they had
told banks to stop swap transactions, bringing some semblance of
calm back to the market, dealers said.

Market participants are usually able to borrow on a short term
basis -- technically called tomorrow/next, meaning they have to
pay it back with interest in a couple of days.

This allows them to go short in a currency, or sell a currency
they do not have in anticipation of it falling and being able to
finalize the deal with money bought later at a lower rate.

A U.S. bank dealer in Singapore said the early surge in
tomorrow/next rates for the ringgit and rupiah had made the cost
of holding such loans much too expensive for speculators.

"A lot of funds are cutting their long dollar positions. It's
a bloodbath. The funds have been hurt very badly," the dealer
said of those who had to pay hugely expensive interest rates for
currency to close their positions.

Dealers said it was not clear whether the central bank had
indeed asked Kuala Lumpur banks to stop quoting tomorrow/next
rates to offshore parties, as the Thai central bank did on
Thursday to squeeze out speculators.

But they said local banks had definitely been reluctant to
quote to offshore players, pushing tom/next rates up sharply and
causing funds to sell dollars on the spot market to cover their
short ringgit positions.

"If you're a local bank and you see swaps are so tight, and if
you're very long, you just sit back and relax and people will
take you regardless of the spread," said a European bank dealer
in Singapore.

In the Philippines, the peso was firmer against the dollar
after the central bank again sold dollars and raised overnight
interest rates by seven percentage points to 20 percent.

Sim Moh Siong, regional economist at Citibank in Singapore,
said the supply of funds had essentially dried up in regional
currency markets due to fears of a possible spillover from
Thursday's liquidity squeeze in the Thai baht.

Speculators who had gone short on the baht aggressively this
week aid concerns of a slowing Thai economy and talk of political
turmoil in the cabinet were badly burned by the Thai central
bank's moves to support its currency.

"What was done was to isolate the offshore money market from
the onshore market such that those who had sold the currency
before would now suffer losses because of lack of funding," Sim
said.

Regional central banks appeared to have emerged on top in the
battle against speculators. The Bank of Thailand declared victory
in its defense of the baht.

But economists said the central banks could ultimately pay a
high price for their win.

"Investors are now likely to demand a higher interest
differential to offset the increased risk of holding these
currencies and this could hurt the economy, especially if it's
suffering a slowdown," Citibank's Sim said.

Daniel Lian, Asian Bond and Currency Strategist at NatWest
Markets, said there were likely to be more speculative attacks.

"The next round the speculators will be better prepared for
coordinated actions by both the BOT and regional central banks,"
Lian said in a market commentary.

Crisis -- Page 5

Baht -- Page 11