SINGAPORE: Asian currencies enjoyed gains on Wednesday with the South Korean won reaching a 2-1/2-year high against the dollar, fueled by expectation of more steps to contain inflation in the region after China's latest rate hike and by inflows into stock markets.
The won, the Singapore dollar and the Taiwan dollar hit their strongest levels against the yen in more than 10 months on a sustained appetite for higher yields from emerging Asian currencies as Japan's central bank is expected to show readiness to further ease policy.
Emerging Asian currencies are expected to sustain the bullish trend as regional central banks are still in a tightening mode amid stronger economic growth, which also attract inflows to regional shares, analysts and dealers said.
In the past, when China raised rates, there was a "knee-jerk reaction" to sell off risk assets, said Sacha Tihanyi, a senior currency strategist at Scotia Capital in Hong Kong. But this was not justified, as policy tightening across Asia "is obviously needed to attain healthy, sustained growth," he said.
"We are in the midst of a tightening cycle in Asia, with rates and currencies both playing important roles, and I'd look for this to continue."
Earlier on Wednesday, the Asian Development Bank said some of the region's emerging economies were showing signs of overheating, underscoring the need for further policy tightening and more flexible foreign exchange rates to tackle growing inflationary pressures.
China's central bank fixed its daily mid-point for the yuan at an all-time high a day after a rate hike, indicating the country is going all out to fight high inflation.
"Asia inflation is pretty much the focus, so authorities could be more willing to let their currencies strengthen to fight inflation," said Frances Cheung, a strategist at Credit Agricole CIB in Hong Kong.
Cheung prefers the won on strong economic fundamentals and relatively high yield, saying her strategy to go long on Korean treasury bonds and pay won rates "works very well."
Foreign exchange authorities from Asian countries such as South Korea, Singapore, Malaysia and Indonesia tried to slow gains in their currencies but not reverse the trend, dealers said.
"Without intervention, all Asian currencies will jump. But they cannot let their currencies rise too fast and be too strong," said a dealer in Kuala Lumpur.
WON
The won hit a fresh 2-1/2 year high against the dollar on demand from offshore funds such as macro funds and as foreign investors extended to 16 days a streak of sessions in which they have been net stock buyers in Seoul.
Some offshore funds built up yen-short positions versus the won, while exporters such as shipbuilders also chased it for settlements.
The foreign exchange authorities were spotted buying dollars to check the won's strength, but the intervention was seen as just slowing the speed of gains, dealers said.
The intervention was not enough to weaken appetite for the won, they added.
"In the afternoon, the intervention prevented the won from breaking through 1,084, but it looks difficult for the intervention to lift dollar/won, given supplies (of the dollar/won) from various funds since last night," said a foreign bank dealer.
The South Korean currency strengthened to as firm as 1,083.8 per dollar, the strongest since Sept. 10, 2008 and to as strong as 12.6800 versus the yen, the firmest since May 20, 2010.
Standard Chartered upgraded its forecasts for the won. It cited fundamentals such as valuations and said the Bank of Korea is "clearly now more tolerant" of the won's strength.
For the dollar/won, StanChart lowered its forecasts for the middle of 2011 to 1,050 from the previous 1,090. It also cut the pair's forecast for the end of third quarter to 1,030 from 1,080 and for the end of 2011 to 1,025 from 1,050.
PESO
The peso touched a five-month high against the dollar, helped by demand from momentum funds and break-out players.
Foreign investors sharply increased their net stock purchases on Tuesday to $220 million from $21.6 million in the prior session.
On Wednesday, the Philippine central bank was initially spotted buying the dollar at 43.30, a level it had been defending, but allowed the peso to strengthen more, dealers said.
The peso strengthened to as firm as 43.15, its strongest since early November last year.
The local currency has room to rise more, probably to 42.90, the 76.4 percent retracement of its November-January weakening as the 43.30 became a strong support line and it is likely to catch up with gains in most other Asian currencies, dealers said.
"There will probably be a bounce (in dollar/peso) sooner or later because the market has already sold a lot in such a short span of time. But I am still comfortable with shorts USD/PHP as any bounce will be capped under 43.25-30," said a Manila-based dealer.
The peso has risen 1.6 percent against the dollar so far this year, lagging a 4.4 percent jump in the won and a 4.1 percent rise in the rupiah.
TAIWAN DOLLAR
The Taiwan dollar , after market closures on Monday and Tuesday for local holidays, caught up with Asian peers, hitting a near two-month high against the US dollar. The gains were fueled by demand from exporters and foreign investors.
The Taiwan dollar also found support as the island's central bank is expected to follow China's rate hike.
Still, some dealers expect the Taiwanese central bank to buy US dollars to defend T$29 in near term.
RUPIAH
The rupiah hit its highest point in nearly four years against the dollar a day after the country saw strong demand for government bonds.
On Tuesday, Indonesia raised 7 trillion rupiah ($808 million) from a debt auction, and saw strong demand for its short dated T-bills push down yields.
The rupiah strengthened to as firm as 8,645 per dollar, the strongest since May 2007. It is seen having a major resistance at 8,640, the dollar's low that month.
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