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