Indonesia's rupiah rose to its strongest level in more than two weeks on Monday on speculation the central bank may intervene further to support it. Most emerging Asian currencies also gained on expectations that strong stock markets will attract more foreign capital inflows. The Singapore dollar rose on demand against the neighbouring Malaysian ringgit.
Asia-Pacific shares outside Japan rose more than 1 percent, tracking fresh gains on Wall Street. Trading was subdued across Asia ahead of the New Year's holiday and as many investors have already closed out their positions for the year.
"Some optimism on the US economy and year-end position adjustments supported Asian currencies," said Yuna Park, a currency and bond analyst at Dongbu Securities in Seoul.
"It does not mean that the next year's outlook for Asia FX is bright, given the dollar's strength. Still, regional currencies may not fall much if the US economy improves further and the BOJ and the ECB provide more liquidity," Park said, referring to the Bank of Japan and the European Central Bank.
The Chinese yuan, however, fell as the People's Bank of China fixed its midpoint weaker.
Malaysia's ringgit also eased, with shares in AirAsia suffering their biggest one-day drop in more than three years after one of its aircraft went missing.
The rupiah rose as much as 0.6 percent to 12,390 per dollar, its strongest since December 12, as some state-run banks bought the Indonesian currency in thin trading, traders said.
Foreign lenders also purchased the rupiah amid a lack of year-end dollar demand from local companies, prompting stop-loss dollar selling.
The official Jakarta Interbank Spot Dollar Rate (JISDOR), which the central bank introduced last year in an effort to manage exchange rate fluctuations, was fixed at 12,434 rupiah per dollar, stronger than the previous session's 12,467.
Still, traders expect the rupiah to come under further downward pressure if local companies continue to buy dollars next year for hedging, traders said.
The central bank has stipulated that private companies should hedge 20 percent of their dollar needs from January 1 to repay offshore loans six months prior to maturity. It also has warned firms against unhedged loans.
The rupiah is expected to depreciate to as weak as 12,800 if local companies follow the rule, a Jakarta-based trader said. "State-owned corporates might start hedging more often," the trader said.