The Korean won led gains in Asian currencies on Friday, driven by a surprise rate rise in China, dollar weakness ahead of US presidential elections and the yen's rise to six-month highs.
The won rose half a percent since Thursday to 1,119 a dollar, its highest since October 2000.
The Sing dollar met with resistance around 1.6625 a dollar after gaining from initial lows, raising suspicion authorities were intervening.
The Taiwan dollar and the Indian rupee too were up over a quarter percent as markets priced in expectations that China's decision to reform interest rates will be followed by a shift in yuan policy.
The yuan has been in a tight band around 8.28 yuan to the dollar since the Asian crisis, levels the industrialised nations say keep the yuan undervalued and give China an undue advantage.
The People's Bank of China raised the benchmark rates on loans and deposits by just over a quarter of a percentage point, and freed yuan lending rates.
Some analysts saw the move as part of the monetary tightening taking place across Asia, after recent rate rises in Thailand, Taiwan, New Zealand, Hong Kong and India, and were expecting the currencies to be allowed to appreciate.
"It's early days yet but the trading pattern in the present round of US dollar weakness seems different in that the Asian central banks have allowed the nominal values of their currencies drop in line with the broad decline in the dollar," economists at UBS said in a note.
"They now seem to have shifted to simply protecting their currencies from appreciating massively in trade-weighted terms.
"This implies that if the US dollar continues to fall further, one could expect further losses in dollar/Asia as well." Still, China's rate rise sparked fresh fears of a slowdown in demand for commodities and caused the Aussie dollar to fall initially and commodity stocks to decline.
Yuan non-deliverable forward (NDF) markets were volatile as traders differed on the chances of a yuan revaluation after this surprise rise in rates.
Some felt China's decision to raise rates for the first time in almost a decade and to free up yuan lending rates signalled policy reform and would be followed by steps to liberalise the tightly pegged yuan.
"This (rate rise) is within our expectation and brings us closer to our second expectation that the next move will be a revaluation in China," said Claudio Piron, currency strategist with J.P. Morgan.
"This represents a move towards a market-based policy measure and they would not have done this if they were not confident about the underlying strength of the economy."
Other analysts said the move reduced the need for monetary tightening through a yuan appreciation and that China's preoccupation with slowing its heated economy took priority over any yuan policy change.
"Hypothetically, if the administration wanted to slow activity, a revalued exchange rate was one tool available to them," Westpac Bank's Huw McKay wrote in a note.
"The other options - reserve ratios, administrative measures, interest rates, fiscal policy - have all been exercised to some extent. That should reduce pressure on the currency rather than increase it."
Premium on the yuan in non-deliverable forwards initially fell and then rose, with the two-month premium hitting a February peak of 670 points. That prices the yuan at 8.21 in two months.
Comments
Comments are closed.