Asian central banks moved to prop up falling currencies on Tuesday to help prevent surging oil prices from stoking inflation in economies bracing for a global slowdown. Central banks in Indonesia, the Philippines, South Korea and Taiwan were spotted selling dollars to support their currencies under pressure from inflation fears and wobbly stock markets, currency traders said.
Asian central banks have traditionally intervened to prevent the currency appreciation which would hurt exports, the main driver of growth for most of the region's economies. But the focus of policy in some countries is now shifting to containing inflation with oil prices at record highs above $130 a barrel driving up costs across the economy and fuelling demands for higher wages.
"In choosing between a stronger currency and potentially higher rates it would seem authorities believe higher rates would be more detrimental for growth prospects," said Magnus Prim, chief Asia strategist at SEB in Singapore. A strong domestic currency makes imports cheaper, helping limit the inflationary impact of soaring energy costs.
"This may become a common pattern in Asia," said another analyst in Singapore. "Central banks would need to draw down their reserves, given the turn from trade surpluses to trade deficits and much more sparse capital inflows," said the analyst who declined to be named.
In South Korea, where the central bank is under political pressure to cut interest rates, authorities intervened three times in one day to support the won, Asia's second worst performing currency this year after the Pakistan rupee. Five currency dealers in Seoul said the Bank of Korea had sold as much as $800 million to support the won for the second time in a week. They reported two more interventions later in the day, estimating a total of nearly $2 billion had been spent.
The won, which has fallen 9.8 percent this year, has been under pressure from a soaring oil import bill, foreign selling of local stocks and a government plan to control overseas borrowing as the country braces for its first current account deficit since the Asian financial crisis 11 years ago.
The central bank said this month South Korea economic growth would likely slow to around 4.5 percent this year from 5.0 percent in 2007. The bank kept rates steady this month because inflation is running at a four-year high of 4.1 percent, above its target of between 2.5 percent and 3.5 percent, partly due to rising import costs.
But minutes from the Bank of Korea's meeting showed two of the central bank's six board members wanted rates to be cut, and that the central bank believed a weak won has more negative than positive effects on the economy.
Three Manila-based traders said the Philippine central bank sold dollars around 43.70 per dollar, although the peso still fell to a low of 43.73, its weakest since November. One trader estimated the central bank had sold around $200 million.
The peso, Asia's top performer in 2007, has fallen 5.5 percent this year against the dollar. The rupiah has fallen 1.3 percent in the past month against the dollar despite its high yield, shunned by investors who fear that the central bank may not raise rates aggressively enough to temper inflationary pressures.
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