SINGAPORE: Most emerging Asian currencies fell on Thursday as investors covered short positions on the dollar over growing scepticism on whether European leaders will be able to agree on a plan this week to ease the debt crisis.
The South Korean won came under more pressure as demand for the dollar increased from local importers, while currency players ignored the central bank's decision to leave interest rates unchanged.
The Indonesian rupiah also showed muted reactions after Bank Indonesia held rates as expected.
France and Germany will present a plan on Thursday to amend the EU treaty, aimed at restoring market confidence and stopping the crisis from spiralling out of control.
But optimism was tempered on Wednesday, when a senior German official told a pre-summit briefing he was "more pessimistic than last week about reaching an overall deal."
In addition, the International Monetary Fund (IMF) denied a report that the Group of 20 nations were planning to assemble a $600 billion IMF lending facility that could be used to bolster the euro zone countries.
Continuous skepticism about the summit dented riskier assets such as Asian stocks and commodities.
"There are hints of expectation-management from political leaders. This is not good, particularly as they have consistently disappointed in the past," said Sacha Tihanyi, senior currency strategist for Scotia Capital in Hong Kong. "Certainly defensive positioning is the safest way to play the market ahead of the summit given the direction of risks."
"I am actually not optimistic, and so I think that a failure to agree to anything significant and fundamental will lead to very sharp risk aversion, which wouldn't be good for Asia ex-Japan," Tihanyi said.
On Wednesday, interbank speculators bought emerging Asian currencies, betting on progress to tackle the euro zone's debt crisis in the summit, leading to a view that they may suffer if European leaders disappoint again.
Some investors are looking to sell emerging Asian currencies on rallies amid persistent worries about the euro zone's fiscal problems.
"We are looking to sell risk into any bounce seen after the EU summit. If Asian currencies rally we don't think it will be sustained," said Jonathan Cavenagh, foreign exchange strategist for Westpac in Singapore.
"We don't think the summit is going to deliver anything substantial and that Europe's woes will continue. All of this is bad news for global growth and in turn that should see Asian currencies fall at some stage."
Cavenagh said the won, the Malaysian ringgit, the Singapore dollar and the Indonesian rupiah would be more vulnerable.
WON
Dollar/won rose as importers and interbank speculators covered short positions amid skepticism over the European summit.
Higher dollar/won non-deliverable forwards (NDFs) also supported the pair.
One-month dollar/won NDF rose 0.4 percent to 1,133.50, supported by a trendline at 1,126.17.
SINGAPORE DOLLAR
US dollar/Singapore dollar rose in subdued trading as the city-state's stocks underperformed other regional bourses.
The pair also has support by a trendline from November's low at 1.2811, while having resistance around 1.2912, the 38.2 percent Fibonacci retracement of its slide between late November and early December.
RUPIAH
Dollar/rupiah rose in extremely thin trading, although the central bank's selling intervention was spotted, dealers said.
The central bank kept its benchmark overnight rate at 6.0 percent.
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