SINGAPORE: The Taiwan dollar on Friday ended its worst quarter since the 1997 Asian financial crisis and the South Korean won saw its biggest quarterly loss in three years as investors continued to cut exposure to riskier assets on fears that Europe will not be able to defuse its debt crisis.
Offshore funds and local interbank speculators sold the regional units as Germany's approval of expanded powers for a euro zone bailout fund failed to soothe fears that the euro zone's problems were spiralling out of control.
Worries about a slowing global economy also spurred a flight to safe-haven assets such as the US dollar, with Asian stocks set for their worst monthly performance in nearly three years. On Wednesday, Latin American currencies also fell, with the Mexican peso and the Brazilian real reversing earlier gains.
Investors halved their bets on the Chinese yuan in the lastt two weeks and are at their most bearish on the Indonesian rupiah in two and a half years, a Reuters poll showed on Thursday.
The yuan, which had been showing more resilience than other emerging Asian currencies to the late summer global rout, hit its lower trading limit against the dollar.
"I'd like to be long dollar/Asia on dips cautiously next quarter. We are seeing fresh problems from China with some betting on a hard landing in the economy, while we have not seen clear solutions from the euro zone yet," said a senior dealer at a European bank in Seoul.
Earlier, the HSBC's purchasing managers' index showed China's manufacturing sector contracted for a third consecutive month in September, though most economists do not expect a sharp slowdown in broader economic growth at this point.
Sacha Tihanyi, senior currency strategist for Scotia Capital in Hong Kong, said more losses may be in store for emerging Asian currencies in the fourth quarter.
"The euro zone issue is not dead and buried and CNH is too volatile as a proxy for CNY for the time being as well," Tihanyi said, referring to offshore yuan trading.
But he said he would look at buying call options of three to six months for emerging Asian currencies to take a view on regional fundamentals that look slightly more optimistic.
Emerging Asian currencies have been pressured by dollar-demand in non-deliverable forwards (NDFs) from offshore institutional investors, which in the past few weeks have rushed to hedge against further weakness in the regional units. Some funds built up dollar-long positions against them.
The Taiwan dollar lost 5.6 percent against the dollar in the third quarter, its largest quarterly percentage loss since the last three months of 1997, according to Reuters' calculations.
The won was the worst performing emerging Asian currency during the third quarter, tumbling 9.4 percent. It was the won's worst quarterly fall since the third quarter of 2008 during the the global financial crisis.
The falls came even as Asian central banks were spotted selling dollars to limit their currencies' declines. Regional authorities are expected to continue intervening in markets in the coming quarter to slow the rate of further declines, dealers and analysts said.
Still, they may allow their currencies to depreciate somewhat to maintain export competitiveness amid a slackening global economy.
Highlighting those views, the Philippines' central bank governor said the country can use monetary policy to support growth and needs to be ready to adjust settings as global economic conditions change.
But some investors looked to buy emerging Asian currencies on dips, saying markets may have priced the euro zone worries in and citing stronger fundamentals than developed markets.
"Everything is up to the European issues. But I think Asia have been damaged enough. I wonder how much further the markets want Asian currencies to fall," said a senior Singaporean bank dealer.
Michael Hasenstab, portfolio manager at Franklin Templeton Fixed Income Group, who manages $ 150 billion in global fixed income assets, expects emerging Asian currencies to strengthen, eventually.
Hasenstab told Reuters in an email that higher economic growth in the region and the yuan's appreciation would help Asian units strengthen.
"Our long-term view is that once we get through the short-term panic, in which there has been a flight to US Treasuries, capital is going to continue to flow into Asian economies," he said.
The won fell as onshore interbank speculators and some offshore funds sold it before a long weekend with importers' dollar demand for end-quarter settlements.
Exporters provided some relief to the South Korean currency amid caution over possible dollar-selling intervention by the country's foreign exchange authorities.
Goldman Sachs expects the won to stay firmer than 1,200 per dollar amid further interventions, saying the local currency could be far more stable than in late 2008.
Goldman said strengthened reserve coverage of short-term debts and a more stable investor base for bonds will also help stabilise the won.
It estimates that of total foreign holdings as of August this year, 43 percent were by sovereign investors, compared with 29 percent in Aug 2008, thanks to inflows from emerging markets and sovereign or quasi-sovereign funds in China, Singapore, Thailand, Kazakhstan and Malaysia.
"While we do not rule out a spike in the USD/KRW with fairly limited intervention, a more plausible development would be a stable KRW amid strong intervention," Goldman said in a note.
In late September, the authorities were spotted selling dollars to protect the 1,200 level, according to dealers.
The Philippine peso shed 0.5 percent against the dollar as speculators covered dollar-short positions for the end of the quarter.
But some dealers are looking for buying the peso on dips on possible remittances inflows.
"European debt worries will still be in focus although I think this issue would have a lot less weight now with the current developments," said a European bank dealer in Manila.
"Unless we see a major downturn in the global economy in the next couple of months, inflows from remittances would most likely provide some support for the peso."
Earlier, the central bank governor said he expects remittances to stay resilient despite global uncertainties.
The Taiwan dollar fell on outflows from agents of Qualified Foreign Institutional Investors and as importers including oil companies bought US dollars.
The central bank was spotted selling the greenback almost all day long, dealers said.
But the island's currency is expected to stay weak in the fourth quarter, dealers said.
"TWD will remain weak as USD still is seen supportive in Q4. If the global goes into a recession, TWD may further weaken to 31.5," said a Taipei-based dealer.