The won led losses in most emerging Asian currencies on Friday, rattled by rumours of an incident at North Korea's nuclear facilities, though some of the units managed to post weekly gains, suggesting appetite for the regional assets still exists.
The North Korea rumour, which came as the euro extended declines, bolstered risk aversion and prompted interbank speculators to cover dollar-short positions against emerging Asian currencies. But many emerging Asian currencies recovered losses as officials in Seoul and Tokyo said they had not heard anything regarding incidents in North Korea, but were investigating.
The South Korean won lost nearly 1 percent against the dollar for the week. However, investors are likely to focus more on the developments in the euro zone's debt crisis, traders said. "It's not particularly the tensions. The market sells because it feels like selling," said Andy Ji, Asian currency strategist for Commonwealth Bank of Australia in Singapore, when asked if the tensions would push down emerging Asian currencies more.
The Singapore dollar and the Malaysian ringgit may also be more vulnerable to outflows if the European situation deteriorates, as market players will be quick to unwind long positions taken recently, some said. Regional currencies were mixed on the week, while the euro has fallen about 1.3 percent against the dollar so far this year, hitting a 16-month low.
"It would appear that Asian currencies are benefiting to some degree from foreign inflows to Asian stocks and bonds. Also, there is some relative value flow, selling EUR-AXJ," said Callum Henderson, global head of FX research with Standard Chartered Bank in Singapore.
Dollar/won rose as offshore funds and importers bought the pair, causing local interbank speculators to cover short positions. "The exchange rate moved sharply on rumours that a nuclear facility exploded in North Korea at a time when eurozone concerns had already depressed sentiment," said a currency trader at a South Korean bank.
Dollar/Philippine peso gained as interbank speculators added long positions on worries about the eurozone, but some players are looking to take profit from its rises before US job data later in the day. US dollar/Singapore dollar slightly rose as investors covered short positions on the eurozone's worries and the rumours over North Korea. The pair may target December 29's high of 1.3055 if the euro extends slide.