Asian currencies: Thai baht hits two-month low as oil prices surge

INDONESIA: Most Asian currencies weakened on Monday, with Thailand’s baht leading losses, as elevated oil prices and rising US Treasury yields eroded the region’s interest-rate advantage, while stocks also traded in the red.

The US-Iran standoff continued after the US rejected Iran’s peace proposal over the weekend, spurring another leg higher in oil prices, keeping an October Fed hike in play and pressuring global bonds. Ten-year US Treasury yields held above 5.1percent and the greenback is near a two-month high.

A prolonged period of higher energy prices is seeding inflation risks in oil- and natural gas-importing economies and threatening to widen fiscal gaps. Rising US yields also threaten to divert capital towards dollar assets, undermining emerging Asian currencies.

“US yields have risen faster than local yields across several Asian markets, widening the US yield advantage and weakening relative rate support for regional currencies,” Lloyd Chan, FX strategist at MUFG said in a note.

Thailand’s baht weakened as much as 0.8percent to 33.635 against the dollar, its lowest since late July.

Currencies of oil importers that run a current account deficit, including Indonesia’s rupiah, the Indian rupee and the Philippine peso, all depreciated between 0.1percent and 0.4percent. The three currencies have been the biggest laggards in the region this year, with Indonesia’s rupiah faring worst, down over 7percent.

The deterioration in relative-rate support has been particularly pronounced in Thailand and Indonesia, leaving both currencies exposed, Chan said.

Thailand’s weak economic growth limits the scope for tighter monetary policy to counter external pressures, while Indonesia has increasingly relied on non-rate measures to support the rupiah even as foreign portfolio outflows have resurfaced, he added.

Data from last month showed Thailand’s economy expanded 1.9percent year-on-year in the second quarter, down sharply from 2.8percent growth in the quarter prior.