Exporters, real money accounts and hedge funds chased the South Korean currency higher, while interbank players dumped dollar positions after Seoul and Tokyo agreed to expand their currency swaps more than five fold.
The swap deal triggered a broad move higher in the Singapore dollar, Indonesian rupiah and Malaysian ringgit, with investors interpreting the swap as favourable for risk taking because it was aimed at preventing instability in the market in emerging Asia most dependent on short-term foreign funding.
"Offshore funds sold dollars to unwind long dollar positions, which they had built before to hedge. I see more of a dollar decline as exporters are getting more active," said a senior foreign bank dealer in Seoul.
A major hedge fund sold a large amount of dollars, another dealer added, as some offshore investors were seen re-hedging their bets against the won's weakness.
In the third quarter, the won saw the biggest quarterly loss in three years as investors cut risk positions on worries about the euro zone's debt crisis.
During the past three months, emerging Asian currencies were hit by dollar demand via non-deliverable forwards (NDFs) as offshore institutional investors rushed to hedge against further weakness in local currencies.
South Korea and Japan agreed to open a new dollar-local currency swap arrangement worth the equivalent of $30 billion and to expand an existing bilateral yen-won arrangement to $30 billion from $3 billion.
The won was as firm as 1,128.4 per dollar, the strongest since Sept 19, breaking through a 100-week moving average of 1,133.0.
"The deal will ease worries about possible liquidity crunch in case of higher external risks," said Jeong My-young, a currency strategist at Samsung Futures in Seoul.
"Everything is up to the Europe. But we need to open the door to see 1,100 around the 61.8 percent retracement (of its rise between August and October," Jeong added.
SINGAPORE DOLLAR
US dollar/Singapore dollar slid as interbank speculators sold it on the euro's rebound.
The pair briefly broke through a support at 1.2600, near the 50 percent retracemnt of its rise between late July and October as the euro recovered the $1.38 level.
But dollar/Singapore dollar rebounded to above 1.26 on the euro retreated.
RINGGIT
Dollar/ringgit fell on the euro's recovery, but it has a firm support around 3.1057, the 38.2 percent Fibonacci retracement of its rises from 2.9320 to 3.2130 between late July and October.
"People are still cautious ahead of Sunday," said Saktiandi Supaat, head of FX Research at Maybank in Singapore, referring to the European summit on Oct 23.
But he said dollar/ringgit may slide on bond inflows in the longer term if the European worries ease more.
"There has been interest in Malaysian bonds as overall yields looks pretty OK and the economic prospects looks stable in the government bonds side."
In September, the ringgit suffered bond outflows in September.
BAHT
Currency investors showed muted reactions to the central bank's decision to hold interest rates as expected.
But dealers expect dollar/baht to rise on worries about the floods' impact on the economy.
A Bangkok based dealer said he prefers buying the pair on dips as 30.60-3.65 levels are seen supportive.
Copyright Reuters, 2011