Asian currencies weakened on Friday in line with the Japanese yen as the dollar rebounded broadly ahead of US jobs data. But traders were circumspect about the dollar's rally and most analysts felt the relative hawkishness of monetary policy in other developed economies would prop up those currencies against the dollar.
The Indonesian rupiah, Malaysian ringgit and Taiwan dollar all shed between 0.1 percent and 0.2 percent against the dollar, which pulled back from a 26-year trough against sterling and rallied against the yen.
Strong US services data sparked expectations Friday's non-farm payrolls data might exceed estimates and further ease concerns that the Federal Reserve might need to cut rates later this year. The dollar had weakened in the past week as investors bought into the view that US rates will be steady for the rest of the year.
The Bank of England raised rates, as markets had expected, on Thursday and the European Central Bank endorsed expectations for a rate rise in the euro zone in September.
"We are still cautious on the dollar. The data flow is generally lukewarm from the US side and there is still not a lot of clarity on monetary policy when most other G10 central banks are still sounding relatively hawkish," said Craig Chan, strategist at Lehman Brothers.
David Mann, a strategist at Standard Chartered Bank, said Friday's non-farm payrolls, if strong, could give the dollar a short-term boost but he expected dollar selling by next week. "There is still good appetite to buy Asia-ex-Japan Fx on dips,"he said.
So analysts retained their bullish forecasts for the rupiah a day after Bank Indonesia cut policy rates for the 13th time in just over a year and said it had room to relax policy further. The Korean won managed small gains to hit 920 per dollar on Friday, despite several warnings this week from Korean authorities on what they deemed unwarranted strength.
Even the Thai baht rallied to a fresh 10-year high of 33.94 per dollar despite Bank of Thailand efforts to rein it in. Chan said there was scope for more flexibility in Korea's stance on the won in the medium term, particularly if growth from both domestic demand and exports picked up, the cash supply remained flush and inflation rose.
"If these factors continue to intensify, people will start to see a contradiction in monetary policy," he said. The Malaysian ringgit was one of Asia's worst performers, weighed down by falling local bond prices. Quoted as low as 3.4550 per dollar, the normally slow-moving ringgit has fallen 0.8 percent in three trading sessions.
A ringgit trader said foreign investors were pulling out of Malaysian assets. In the bond market falling prices have caused 10-year yields to rise 25 basis points in less than a week and the stock market is lacklustre.
"There are a few reasons: firming global yields, talk of some adjustments by foreign investors in domestic bonds, a market finally convinced that Bank Negara is not about to cut rates, and a ringgit that is not expected to move significantly in the very near term," said Emmanuel Ng, strategist at OCBC Bank.