Asian currencies extended their rally against the dollar on Monday even though analysts felt the reaction to last week's comments on China's diversifying its reserves was overdone and other factors were driving the moves.
The dollar hit a 2-1/2-month low versus the euro on Friday after People's Bank of China Governor Zhou Xiaochuan said Beijing planned to diversify its estimated $1 trillion in currency reserves. That also buoyed the yen and other Asian currencies.
The rally continued on Monday. The Taiwan dollar hit a 2-month high of 32.716 per US dollar, the Singapore dollar was around 1.5550 per US dollar and within striking distance of a 9-year high of 1.5545 struck late on Friday.
The Thai baht hit a fresh 6-1/2 year high of 36.46 per dollar. The Korean won was near a 9-year high around 928 per dollar, prompting Korean finance ministry officials to say they were monitoring the movement and that the won's rise was not based on fundamental factors.
Most analysts felt the reaction to Zhou's comments was exaggerated. "Nothing has changed. It's basically a continuation of China's reserve diversification policy and saying it more loudly doesn't make it more threatening," said UBS currency strategist Nizam Idris.
Idris reckoned the market was merely using the comments to adjust large short positions in the yen ahead of Japanese GDP data, a Bank of Japan policy meeting, US inflation and US housing figures this week.
"The dollar is going to remain sensitive to external factors such as the comments from China and Japanese GDP and we don't think US data this week is going to be supportive for the dollar as well," he said. The Taiwan dollar, Malaysian ringgit and South Korean won would benefit the most in this yen-driven rally, he added.
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