Emerging Asian currencies slid on Friday as the dollar hit a seven-month peak on the euro's weakness after the European Central Bank dampened speculation about plans to reduce stimulus, while lower oil prices soured risk sentiment. Regional currencies came under further pressure as the Chinese yuan touched another six-year low, dragging the Singapore dollar to its weakest since early March.
South Korea's won led regional losses on dollar demand from importers. The Philippine peso fell a day after President Rodrigo Duterte announced his "separation" from the United States. Trade Minister Ramon Lopez on Friday said Manila would maintain its trade and economic ties with the world's top economy. Indonesia's rupiah eased after the central bank unexpectedly cut interest rates on Thursday. The currency found some relief as most government bond prices rose.
The Malaysian ringgit slumped with oil prices falling, while investors were awaiting the country's 2017 budget due later in the day. The US dollar hit a seven-month high with the euro's weakness. The ECB left its ultra-loose monetary policy unchanged on Thursday but kept the door open to more stimulus in December, with ECB President Mario Draghi dousing recent market speculation that the central bank may begin tapering its 1.7 trillion euro asset-buying programme.
The ECB's monetary policy stance could continue to support emerging Asian assets, but markets focused more on expectations of the US Federal Reserve's interest rate hike in December. "Emerging Asian currencies will weaken further until markets price in 80-90 percent chance of a Fed hike in December," said Sean Yokota, head of Asia strategy at Scandinavian bank SEB in Singapore.
US interest rate futures implied traders saw more than a 70 percent chance of a rate hike in December, according to CME Group's FedWatch program. Yokota also said sentiment could stay fragile until the US presidential election on November 8, although Democratic presidential nominee Hillary Clinton is seen beating Republican rival Donald Trump. "Memories of Brexit are too close," Yokota said, referring to Britain's surprise vote to leave the European Union in June.
The yuan has lost 0.4 percent against the dollar so far this week, and is set for a third straight weekly loss. The Chinese currency has been under pressure as the world's second-largest economy has not shown clearer signs of a recovery yet. Local companies also need dollars to repay foreign debts and for overseas investments. "Weak exports scream for a weaker yuan, but at what expense as far as capital outflows," said Stephen Innes, senior FX trader for FX broker OANDA in Singapore.
"The yuan will weaken gradually into the year-end from fundamental issues unless there is a huge surprise in the economic climate both in China and the globe," Innes said, adding his year-end forecast for offshore yuan is 6.8000 per dollar. The so-called CNH fell to as weak as 6.7664 earlier. Singapore's dollar on Friday slid to 1.3954 to the US dollar, its weakest since March 3, extending its weekly depreciation to 0.2 percent.
The growing risks of recession in the trade-reliant economy has raised prospects of an off-cycle easing in monetary policy, a Reuters poll showed, although for now the consensus among economists is for the central bank to sit tight in the hope the economy sparks to life. By contrast, the Thai baht has gained 0.4 percent on hopes for calm after King Bhumibol Adulyadej, the world's longest-reigning monarch, died last week. The Philippine peso has also risen 0.2 percent as sentiment improved on optimism that Duterte's foreign visits would create an inflow of business. China and the Philippines will sign $13.5 billion in deals during the president's trip to China this week, Trade Minister Lopez said on Thursday.
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