Strong buying pushes Asian currencies to further heights

Strong buying pushes Asian currencies to further heights

SINGAPORE (Dow Jones): Strong buying interest catapulted the
Indonesian rupiah to its highest level in eight months during
Asian trading hours on Wednesday.

The heavy demand for the local currency, which was variously
attributed to domestic banks and corporations or to offshore
hedge funds, at one point pushed the rupiah to a level of Rp
7,050 to the U.S. dollar, 8.5 percent above Tuesday's close and
more than double its value just three months ago.

Should the current level of demand be sustained, some analysts
see the rupiah strengthening further to Rp 6,000, a level many
observers derided as wildly unattainable when in March the
Indonesian finance ministry named it as the government's year-end
exchange rate target.

"An exchange rate of Rp 6,000 is not unreasonable as a long
term equilibrium level," said David Fernandez, regional economist
at J.P. Morgan in Singapore.

Late in Asian trading the U.S. dollar was quoted at Rp 7,200,
up a little from its earlier low, but still down steeply from Rp
7,650 late in Asia the previous day, and lower than any closing
level since Feb. 11.

The rupiah's surge helped boost sentiment towards other Asian
markets, as regional currencies ended the day higher throughout
the continent.

"The picture is of Asian currencies maintaining their firm
tone, supported by the strength of the yen and by the perception
that the U.S. dollar faces repeated interest rate cuts down the
road. On that basis the dollar bull run is probably over," said
Daniel Lian, Singapore-based head of Asian markets research at
ANZ Investment Bank.

Despite the impressive velocity of the rupiah's drive higher,
market participants remain divided over exactly what forces have
propelled the Indonesian currency upwards.

Some traders attributed the rally to market players attempting
to front-run disbursements of assistance funding by the
International Monetary Fund. Proprietary traders, they say, are
buying rupiah in the expectation that the release of a further $1
billion early next month will further buoy the local currency.

Other market participants point the finger at offshore hedge
funds, which they say are falling over themselves to buy rupiah
in order to cut back the size of their highly geared long dollar
positions.

Other traders, however, say it is Indonesian banks and
corporations that have been caught on the wrong side of the
market as the dollar has tumbled.

Prevented by their poor credit quality from borrowing dollars
to service foreign currency-denominated debts, in recent months
Indonesian banks had little option but to buy U.S. dollars at
rates between Rp 12,000 and Rp 15,000. Now, say traders, a
falling U.S. currency is forcing them to unwind those positions
at a heavy loss.

Meanwhile, offshore investors are buying rupiah in order to
purchase Bank Indonesia's short term notes, which carry a
handsome 60 percent yield.

"The feeling is that there is sufficient stability to take
advantage of the spectacular interest rates on offer," said
Fernandez at J.P. Morgan.

Fernandez explained that the combination of assistance funding
inflows with the cessation of outflows following Indonesia's debt
restructuring deals has improved confidence in the rupiah, and
that participants are returning to the market.

Among other regional currencies, the Philippine peso rose
strongly, boosted by healthy flows of investment funds into both
the equity and the debt market, according to market participants.

At the close of trading on the Philippine Dealing System, the
U.S. dollar was quoted at 42.605 pesos, down from 42.880 pesos at
Tuesday's close.

Against the baht, the U.S. dollar ended Asian trading at 37.82
baht, flat compared with the previous day's level.

Against the Singapore dollar the U.S. currency ended Asian
trading at S$1.6196, down from S$1.6220 the day before, as the
Singapore dollar faithfully tracked the movements of the yen.

In North Asia, both the new Taiwan dollar and the Korean won
rose against the U.S. dollar.

At the close of trading in Taipei, the U.S. currency was at
$32.843 New Taiwan dollars (NT), down from NT$32.987 on Tuesday.
In Seoul, the dollar closed at 1,325 won, down from 1,328 won.