Most Asian currencies were little changed on Tuesday, trapped between weakening domestic stock markets on the one hand and a big jump in the Japanese yen and a rising Chinese yuan on the other.
Stock markets across Asia weakened on Tuesday, with indexes in South Korea, Thailand and Indonesia shedding one percent each and Singapore's Straits Times Index losing 2.5 percent. Traders said that became a reason for pushing up implied volatilities on the yen and causing some unwinding of yen-funded carry trades. The dollar lost more than one yen, hitting lows near 119.40 yen versus the day's high of 120.75.
The Chinese yuan picked up in late trade, briefly hitting 7.7412 per dollar, its highest since China revalued the currency in July 2005. Traders gave various reasons for its rise. Some said the yuan was following the yen, others cited the possibility of China raising interest rates.
"We're seeing across-the-board selling of dollar/yen and some yen crosses," said Gerrard Katz, head of north Asian currency trading at Standard Chartered Bank. "We see the dollar coming under more pressure," he said, adding that was due to geopolitical tensions.
Another Asian currency trader said the Asians would stay weak because stock markets in the region were falling and that would make people averse to risk. Fresh US economic data and the visit of US Treasury Secretary Henry Paulson to Beijing next week might provide more guidance on future direction, traders said. It will be Paulson's third visit to China since he took office last year.
The Singapore dollar also jumped in late trade to as high as 1.5253 per US dollar, its strongest level in more than nine years. The South Korean won was flat at 938.6 per dollar, while the Taiwan dollar gained about a tenth of percent to 32.92 per US dollar.
The Thai baht gained nearly a fifth of a percent to 35.53 per dollar onshore but the Philippine peso eased to 48.33 per dollar. Emmanuel Ng, a currency strategist at OCBC Bank, said he believed Asian currencies would log fresh gains against the dollar, buoyed by signs of slower US growth and Paulson's visit to China, during which he could press for faster yuan rises.
"The market is probably expecting some dollar weakness for the next couple of sessions," he said. Many traders expect the yuan to resume its long-term appreciation against the dollar. Analysts see the yuan rising 5-6 percent in 2007, compared with 3.4 percent in 2006.
US data, including January figures on durable goods and February consumer confidence later in the day, could point to a slowing economy and offer reasons for the Federal Reserve to cut interest rates later this year.
Investors are also keeping an eye on rising defaults among high-risk borrowers in the US sub-prime mortgage market. Elsewhere, the Malaysian ringgit eased slightly to 3.49 per dollar after the central bank kept interest rates on hold on Monday, but analysts remain bullish on the currency.
"The ringgit is drawing its strength from several sources - externally it is a weaker dollar against Asian currencies, notably against the Singapore dollar," analysts at DBS said in a research note. "Domestically, the stock market is close to achieving a new record high on record turnover."