Asian currencies rallied to multi-week highs against the dollar on Friday, propped up by foreign investment inflows, the Chinese yuan's steady rise and the weakness in the US currency.
The Chinese yuan's rise to 7.8870 per dollar, its highest level since its revaluation in July 2005, helped boost Asian currencies across the board. The Singapore dollar rose to 1.5650 per US dollar, a 5-month peak, with the market wary of any intervention by the Monetary Authority of Singapore. Traders said the MAS had been suspected of intervening on Thursday.
"But the market is still looking to buy the Singapore dollar, presumably still taking the unit as a proxy to yuan views. The Sing dollar has remained as the currency with the highest correlation and beta to the yuan," analysts at UBS said in a note to clients.
The Thai baht climbed to 36.84 to the US dollar, its strongest level since January 2000, while the Indonesian rupiah rose as far as 9,075 per US dollar, its strongest since September 6. Thailand has received a net $446 million worth of net foreign portfolio investments so far this month, stock exchange data showed, taking total net investments this year to more than $3 billion.
Bank of Thailand Governor Tarisa Watanagase said on Friday the central bank may raise the limits on offshore investment to ease pressure on the baht. She had warned markets earlier this week that the baht's rise had been too rapid.
The dollar's broad weakness underpinned regional currencies. It was under pressure as the market priced in expectations the Fed would continue to keep rates on hold after it kept them steady this week for a third straight meeting.
The ringgit was quoted at a seven-week high of 3.6480 per dollar, propped up by foreign inflows into Malaysian assets. The South Korean won hit a one-month high.
Analysts said portfolio investments into Asia could increase after Chinese lender Industrial & Commercial Bank of China's solid trading debut on Friday following its record US $19 billion IPO.
"It's blue sky ahead for risky assets. What's driving the Asian currencies is confidence-sensitive portfolio flows into regional equity markets," said Tim Condon, ING Bank's regional economist and strategist. "The trend is your friend in this case," he said, adding Asian currencies would continue to appreciate until the end of the year.
Still, the yen lagged the rise in most other Asian currencies after softer-than-expected Japanese inflation data. It rallied to levels around 118.50 per dollar from 118.74 late in Asian trade the previous session but hit a record low against the euro. Japan's core consumer price index in September climbed 0.2 percent from a year earlier, lower than forecasts, sparking expectations that the Bank of Japan could wait until 2007 to raise interest rates. The weakness in the yen was a hurdle for the rallying Asian currencies, analysts said.
"The story in Japan is capital outflows, given the outlook for the economy as well as financial policies are very supportive of dollar/yen," Condon said. "So it will be difficult for this appreciation of regional currencies to become a real strong trend, given the headwind of well supported dollar/yen," he said.
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