SINGAPORE: Most emerging Asian currencies eased on Thursday as investors booked profits before a US Federal Reserve policy announcement later in the day, with the South Korean won losing ground despite the central bank's surprise decision to leave interest rates unchanged.
The pullback came even though the euro held near a four-month high after Germany's Constitutional Court gave the green light on Wednesday for Berlin to ratify the euro zone's permanent rescue fund.
Emerging Asian currency investors took the ruling as chance "to sell on the fact," dealers said.
Interbank speculators sold the Malaysian ringgit, the Philippine peso and the won. Foreign banks also reduced bullish bets on the Taiwan dollar, limiting its upside, dealers said.
"There is some position-squaring (in emerging Asian currencies) ahead of this evening's event," said Sacha Tihanyi, senior currency strategist for Scotiabank in Hong Kong, referring to the Fed's policy announcement.
"There is some chance of disappointment, though I'd say that QE is greater than a 50 percent likelihood," Tihanyi said, adding Asian currencies are expected to fall further if the US central bank does not announce a third round of quantitative easing.
The Fed appears set to launch another round of unconventional monetary stimulus at the meeting, while signaling that a weak US economy may warrant ultra-low interest rates for at least another three years.
But not everyone believes it will embark on another bond-buying spree, and plenty of doubts remain about the likely efficacy of such a move.
Most emerging Asian currencies have risen so far this month on hopes that the Fed may ease policy further this week to shore up the world's top economy, and as European policymakers took steps to tackle the three-year euro zone debt crisis.
The Taiwan dollar and the Singapore dollar were seen technically overbought. The 14-day relative strength index (RSI) of the both US dollar/Taiwan dollar and US dollar/Singapore dollar stood below the 30 threshold.
Some dealers and analysts expect emerging Asian currencies to experience more profit-taking after the Fed's decision, with expectations for another QE seen having been reflected in.
WON
The won slid even though South Korea's central bank unexpectedly held interest rates steady to give it time to assess the impact of domestic stimulus spending as well as Europe's efforts to contain its debt crisis. Most economists had expected a rate cut.
Analysts still expect the Bank of Korea to cut borrowing costs later in the year.
"The Fed holds the key now. But I'd sell the won as the euro is seen running out of steam around 1.30," said a senior foreign bank dealer in Seoul.
RINGGIT
The ringgit slid as interbank speculators reduced bullish bets and booked profits from recent gains in the local unit ahead of the Fed's announcement.
A senior Malaysian bank dealer in Kuala Lumpur said expectations for QE3 appeared to have been priced into the market.
"After tonight, the market will sell on the fact to take profits," the dealer said, adding the ringgit may ease to 3.0900 per dollar.
On Wednesday, the Malaysian currency hit 3.0680, its strongest since May 14.
PHILIPPINE PESO
The Philippine peso eased as traders covered short-dollar positions amid caution over possible intervention by the central bank, although it has not been spotted in the market.
Earlier this week, the central bank had been seen trying to slow down gains in the No.2 performer among regional currencies this year, dealers said.
The peso is expected to suffer from more profit-taking, even though investors still expect the Fed to announce more stimulus measures later in the day, they added.
"Any dips in dollar/peso would be an opportunity to cover short positions," said a European bank dealer in Manila.
TAIWAN DOLLAR
The Taiwan dollar advanced to 29.571 versus the US dollar, its strongest since May 28 on demand from interbank speculators.
But the island's currency could not extend gains as foreign banks booked profits.
Some traders joined bids for greenbacks amid caution over possible intervention by the central bank, seeing the Taiwan dollar's recent gains as overdone.
US dollar/Taiwan dollar's 14-day RSI fell to 19.29, indicating the local currency is excessively bought.
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