Singapore dollar up on safety flows, won cuts falls; still cautious

SINGAPORE: The Singapore dollar rose on Thursday as fund managers looked for havens from global market turmoil while the South Korean won clawed back most of its early losses as Seoul shares resisted the downdraft from a plunge on Wall Street overnight.

Speculation that China may tweak its policy on the yuan, possibly by widening its trading band, and a rebound in the euro also helped limit losses for emerging Asian currencies as global investors continued to recoil from riskier assets.

Still, investors remained reluctant to chase the regional units amid increasing worries that the euro zone's sovereign debt crisis was quickly spreading to the European banking sector, raising the spectre of systemic risk.

"We see how quickly sentiment can shift on rumours and worries that later prove unfounded. The shows how fragile sentiment is, suggesting defensive thinking is probably the best route," said Sacha Tihanyi, senior currency strategist for Scotia Capital in Hong Kong.

"The environment is still highly volatile and the only currencies one should play would be defensively via CNY, CNH, SGD."

High-flying emerging Asian currencies have retreated in recent weeks as investors reduced risky exposure amid debt problems in the United States and Europe and signs that the global economic recovery was losing steam.

Those uncertainty, along with global market turmoil, could persuade Asian policymakers to put plans for any further rate increases on ice, further reducing the appeal of emerging currencies.

South Korea's central bank kept interest rates unchanged on Tuesday morning, as expected, setting in all likelihood a precedent for Asian policymakers forced to respond to the global economic slowdown and briefly halt their battle against inflation.

Indonesia's central bank has introduced a facility to swap its US dollar holdings with Indonesian government bonds held by local foreign exchange banks, a move aimed at stabilising the rupiah and government bonds.

Philippine central bank also said it is working with banks to arrest speculative flows into the foreign exchange market, although there were no plans to impose capital controls.

Amid those moves, investors took recent falls as chances to buy some emerging Asian currencies such as the Singapore dollar.

SINGAPORE DOLLAR

The Singapore dollar rose 0.6 percent against the US dollar as hedge funds and model funds bought the city-state's currency.

The rush for safety has spilled into Singapore and led to the country following the United States and Switzerland where short-term interest rates have turned negative, implying that depositors are willing to pay to keep funds at banks or in short-term bills.

Singapore's swap offer rate (SOR) -- a rate determined by both local deposit rates and FX forwards -- was in negative territory on Wednesday as funds seeking safety flooded the local market with cash. The six-month SOR was fixed in negative territory for the first time ever.

"In the current climate of the US keeping rates low for an extended period of time, and given the MAS's FX appreciation bias, we believe the likely outcome will be sustained low fixes and in the near term, negative fixes," said analysts at Nomura in a note to clients.

The Singapore dollar has been seen as a heaven in Asia, especially after Standard & Poor's stripped the United States of its triple-A rating last week while Singapore retained the prized grade.

The city-state's currency has been the best performing emerging Asian currency so far this year with a 5.6 percent gain against the greenback.

WON

The won erased most of its initial losses as investment banks bought it on dips, prompting local interbank speculators to clear dollar-long positions to cut losses.

Foreign investors continued to sell Seoul stocks, but their sales were smaller than previous sessions and dealers said demand linked to their stock sales was smaller than expected.

Kwon Hyouk-se, head of the Financial Supervisory Service, said he did not see an exodus of foreigners from the country yet as they had bought bonds while selling stocks.

Investors also remained cautious over possible dollar-selling intervention by the foreign exchange authorities, especially if the won weaken past 1,090 per dollar.

Amid the caution, exporters bought the South Korean currency around the level.

RUPIAH

Continuous stock outflows weighed on the rupiah, while investors stayed wary of possible dollar-selling intervention by the central bank.

Although the Indonesian economy is doing well, traders were covering their short dollar positions given the global scenario, said a Japanese bank dealer in Jakarta.

He expects the rupiah to soften more with a resistance at its previous close of 8,520 per dollar, even though the central bank will be able to stabilise the market with sufficient dollars.

Copyright Reuters, 2011