Asian currencies extended gains to multi-week peaks on Tuesday, underpinned by the combination of weakness in the US dollar, fresh speculation on the Chinese yuan and the return of foreign portfolio flows to the region.
The Indonesian rupiah, Philippine peso, Thai baht and Malaysian ringgit, rose more than half a percent each against the dollar. "Hot money is coming back into Asia now that the Fed has turned dovish and the dollar has turned bearish again," said one Singapore-based trader.
The Japanese yen traded in a narrow 114.50-114.80 per dollar range but the euro rose against the dollar and yen after manufacturing data suggested that the chances of a rate rise in the euro zone were growing. Meanwhile, weakness in US factory activity reinforced the view that the Federal Reserve would soon end a two-year monetary tightening campaign.
Also helping Asian currencies was speculation China could either widen the yuan's narrow daily trading bands or announce some fresh measures that would let the currency rise faster, to coincide with the anniversary of last year's yuan revaluation.
China abandoned a decade-old dollar peg for the yuan on July 21 last year, when it revalued the currency by 2.1 percent and started managing it against a basket of currencies.
However, under this system the yuan is only allowed to rise or fall a maximum of 0.3 percent from a mid-point against the dollar each day. A front-page story in the China Securities Journal, an official Chinese economic newspaper, said on Tuesday that widening the trading band of the yuan against the dollar was an urgent task. That report fuelled some Asian currency purchases.
The Singapore dollar hit its highest in a month as it tested levels on the firmer side of 1.58 per dollar. The South Korean won rose to a six-week high around 940 per dollar, shrugging off comments from a senior finance ministry official expressing concern over its rapid rise.
The Taiwan dollar hit a one-month high of 32.185 per US dollar as foreign investors returned to Taiwan's stock market. Data from the stock exchange showed foreigners have invested a net $357.5 million in Taiwanese stocks in just 2 sessions. The Indonesian rupiah rose to a six-week peak around 9,055 per dollar, taking its gains in just under 3 weeks to 5.5 percent.
Traders said the rupiah's rise, despite a widely held view that Bank Indonesia could cut rates this week, was evidence of the rising appetite for risk.
"Once more in Indonesia there is a willingness to view the glass as half full, with talk of slowing inflation allowing scope for a BI rate cut," analysts at Westpac Bank said in a note.
"But the rise in the rupiah itself suggests BI won't be punished for cutting rates this week if they choose to take their chances on the global risk outlook and domestic inflation," they said.
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