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asian_currency_400_thumb307_SINGAPORE: The Singapore dollar hit a fresh high and the South Korean won threatened to break through a 32-month peak on Wednesday, leading gains in their Asian peers, as Asian policymakers are expected to keep using firm currencies to fight inflation and the Federal Reserve is unlikely surprise the market later with a hawkish stance.

Foreign exchange authorities of some countries such as South Korea were suspected of buying dollars, but their intervention was not to reverse their currencies' strength but to slow it, dealers said.

Asian currencies trimmed gains in the afternoon, but that is largely because investors covered dollar-short positions before the results of the Fed meeting and a news conference by Chairman Ben Bernanke.

‘Previously policymakers regarded currency as the last tool, but now they should be treating it as one of the tools being used,’ said Frances Cheung, a strategist at Credit Agricole CIB in Hong Kong.

‘Given that inflationary pressures have been mounting to levels that policymakers have to rely on currency as well -- they may be willing to sacrifice a bit of growth in return for price stability.’

In the past, emerging Asian central banks tried to maintain their currencies weaker to maintain their export competitiveness.

But they are seen allowing currency appreciation to contain inflation, especially of imported goods.

The currencies have been boosted as investors returned to the region seeking higher yields and assets with better economic fundamentals.

Investors are keeping an eye on Bernanke's comments, but the Fed is expected to say it is in no hurry to scale back its massive support for economic recovery.

Asian currencies are expected to stay firm if the Fed ends QE2 as scheduled as it is unlikely to reduce liquidity, which has supported the regional currencies, some economists said.

‘The end of QE2 may reduce liquidity in the public sector, but will not cut liquidity in the private sector,’ said Kim Jong-su, an economist at NH Investment & Securities in Seoul.

‘The liquidity will keep coming to emerging Asia, lifting currencies there as developed countries are not ready to raise interest rates yet.’

WON

The won hovered around a 32-month high against the dollar on stop-loss dollar sales and as foreign investors continued to buy local stocks.

South Korea's foreign exchange authorities were suspected of buying dollar, some dealers said, but the intervention was just ‘smoothing operations,’ which indicates their dollar purchases to slow down its gains or falls, not to reverse its directions.

The won strengthened to as firm as 1,078.4 per dollar, a notch below 1,078.3 hit last week, the strongest since August 2008. On April 21, the authorities were spotted forcing the won to weaken 1,080.

‘What people forget is that the government lets USD/KRW fall because it is necessary,’ said a local bank dealer in Seoul, expecting the won to firm to 1,050 eventually.

Earlier, Goldman Sachs revised its three-month won target versus the greenback to 1,050 from 1,080, saying currency appreciation is a preferable tool for South Korea's inflation fighting.

‘We continue to believe that KRW appreciation is a more effective and desirable way of reducing inflation pressure in the short term than rate hikes, given the high sensitive of inflation to the USD/KRW, a positive balance of payments and a seasonally-strong current account in the near term,’ Goldman said in a note.

Should the won stay at the current level of around 1,080 for the reminder of this year, headline inflation could reach 4.1 percent in 2011, Goldman added.

SINGAPORE DOLLAR

The Singapore dollar hit a record high against the US dollar as the central bank is expected to allow more appreciation to stem inflation.

The city-state's currency firmed to as strong as 1.2300 versus the greenback, but then the gains were erased on US dollar short-covering and it turned slightly weaker.

‘MAS will continue to maintain it gradual and modest appreciation for the SGD given their view that wage pressure will continue to build up. There is more room for SGD to appreciate given the current environment,’ said Perry Kojodjojo, a currency strategist at HSBC in Hong Kong.

Earlier, the Monetary Authority of Singapore said resident wage growth in Singapore could come in slightly lower than the 5.6 percent recorded in 2010, although it will be significantly stronger than the historical average of about 3.3 percent a year.

RINGGIT

Interbank speculators and exporters lifted the ringgit to a fresh 14-year high against the dollar as the Malaysian currency has room to strengthen more to catch up with gains by other Asian currencies.

Standard Chartered recommended adding to short dollar/ringgit positions on the pair's break below 3.00.

‘Risk appetite remains broadly strong, which should support this trade given the Malaysian ringgit's correlation with risk sentiment and capital flows,’ StanChart said in a note.

The euro is also testing a major resistance zone in the 4.3900-4.4100 area against the ringgit, which served as major support in 2006 and 2008 for this cross, causing sizable bounces.

After the resistance area was breached in April 2010, it has acted as a strong resistance zone for the euro, repelling its advance in November 2010 and again last week.

The 38.2 percent retracement of the 2009-2010 decline in the euro/ringgit cross is located at 2.3820.

Investors can consider selling the cross at current market levels of 4.3700 with protective stops placed at 4.4500 for a test of this year's low at 3.9500 as Bank Negara, in line with other Asian central banks, appears inclined to allow a faster rate of appreciation of the ringgit.

Copyright Reuters, 2011

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