South Korea's won fell to near a 5-1/2-year low on Tuesday, leading losses among emerging Asian currencies, on expectations of a central bank rate cut and growing tensions with the North. Most regional currencies also eased on the dollar's broad strength.
The Chinese yuan eased as the central bank set its daily guidance weaker a day after the renminbi's jump. The Malaysian ringgit and the Singapore dollar followed it. The won lost as much as 0.9 percent to 1,219.4 per dollar, nearing its low of 1,221.1 on February 3, the weakest since July 2010. The currency recovered some losses on caution that foreign exchange authorities may intervene around the 1,220 level to stem further weakness in the worst-performing Asian currency so far this year.
"The won is likely to weaken further, given geopolitical tensions and rate cut calls," said Yuna Park, currency and bond analyst at Dongbu Securities in Seoul. "Theoretically, rate cut views could attract bond inflows for capital gains, but a weaker won cut chances of arbitrage trading," Park said. A low bond yields lifts bond prices. South Korea's central bank governor acknowledged the softening economy may warrant policy easing soon but declined to signal any immediate action after leaving interest rates unchanged earlier in the day.
Still, analysts said Asia's fourth-largest economy would show further signs of weakening in coming weeks, pressuring the Bank of Korea to cut the policy rate as soon as at its March 10 meeting. Major foreign banks continued to buy dollars against the won, which appeared to be related with bond outflows, currency traders said. Offshore funds accelerated selling the won after South Korean President Park Geun-hye pledged further "strong" measures against North Korea. That came after the South suspended operations at a jointly run industrial park as punishment for the North's recent long-range rocket launch and nuclear test.
Indonesia's rupiah turned weaker after hitting a four-month high as investors were awaiting the result of the government's bond sale later in the day. The finance ministry aims to raise 12 trillion rupiah ($896.9 million) through the auction, while the ministry said it won't take more than 18 trillion rupiah. Most of government bond prices already advanced. The rupiah opened up 0.6 percent at 13,290 per dollar, its strongest since October 15.
It reversed the direction on dollar demand from importers and as traders cut some of bullish bets ahead of the central bank's monetary policy meeting on Thursday. Bank Indonesia is expected to cut its benchmark reference rate for the second time this year in a bid to lift economic growth, a Reuters poll showed. The official Jakarta Interbank Spot Dollar Rate, which the central bank introduced in 2013 to manage exchange rate fluctuations, was fixed at 13,333, stronger than the previous 13,476. The rupiah has been benefiting as Indonesia provides one of the highest yields in Asia. Loosening monetary policies by major central bank helped investors seek those returns. European Central Bank President Mario Draghi said on Monday the central bank was ready to ease policy further in March, highlighting risks from financial market volatility, a global slowdown in growth, and low oil prices.
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