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Markets

Singapore dollar, won down on economic worries, intervention caution

SINGAPORE : The Singapore dollar and the South Korean won fell on Thursday as investors reduced positions in emerging As
Published August 4, 2011

 SINGAPORE: The Singapore dollar and the South Korean won fell on Thursday as investors reduced positions in emerging Asian currencies on increasing concerns over a global economic slowdown and after Japan intervened to weaken the yen.

Japan sold an estimated 1.6 trillion yen in the market and its central bank eased monetary policy, following Switzerland in efforts to tame currencies buoyed by safe-heaven demand from investors fretting about the health of the global economy.

"Japan's action does show the concern shared by central banks in the region about the strength of local currencies. At the margin, Japan's intervention will encourage other central banks to keep doing what they have been doing," said Frances Cheung, a strategist at Credit Agricole CIB in Hong Kong.

"In this risk off environment, and especially with this partly coming from worries of a US slowdown, Asia could be impacted negatively. So I am getting more cautious towards Asian currencies in the near term."

Asian foreign exchange authorities have been spotted buying dollars in recent weeks to stem upward pressure on their currencies and maintain export competitiveness amid slackening global growth, although they are fighting inflation at the same time.

Commonwealth Bank of Australia's Asian currency strategist Andy Ji sees more dollar-buying intervention in Asia, saying Singapore, Taiwan and South Korea are more likely to keep curbing their currency strength in Asia.

Emerging Asian currencies have enjoyed continuous inflows despite worries about a global slowdown and debt problems in the United States and Europe as the region has stronger economic and fiscal fundamentals.

The regional units may enjoy more inflows, especially if the US Federal Reserve conducts further easing while some Asian countries are still trying to contain inflation, many analysts and dealers said.

On Wednesday, former Fed Vice Chairman Donald Kohn said the US central bank might need to give serious consideration to more easing to spur the world's top economy.

"Unless the QE3 revives a mechanism of credit creation and increases M1 as much as reserve base, that will just boost inflation not rehabilitate the economy," says Lee Jin-woo, research head of NH Investment & Futures in Seoul.

"It's difficult for Asian currencies and other riskier assets to rise, given the situation."

SINGAPORE DOLLAR

The Singapore dollar hit a two-week low against the greenback on US dollar-short covering.

The city-state's currency is seen finding relief from demand from long-term investors, but is expected to remain under pressure in the short-term pressure if global growth worries spur more profit taking.

"The market is taking profit. But lots of people are still trying to see where to short dollar/Asia as it's not a fault from Asia but from the US and EU," said a dealer, adding he prefer short US dollar/Singapore dollar.

"Still, we can wait. There is no need to hurry to sell now."

WON

The won turned lower on stock outflows and local shares hit their lowest close in more than four months.

Foreign investors have been net sellers of Seoul stocks during the three sessions in a row. They dumped a combined more than $1 billion on Wednesday and Thursday. In the previous session, their stock sales were largest since May.

"Stocks look ugly and dollar/won seem to have room to rise, probably to 1,065," said a foreign bank dealer in Seoul.

But some expect the South Korean currency to rebound, saying investors appeared to hold dollar-long positions.

The 14-day dollar/won Relative Strength Index (RSI) rose to 51.5, the highest since late June and well above the 30 threshold, indicating the pair is not in oversold territory.

Copyright Reuters, 2011

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