Asian currencies rallied on Tuesday, pushing the Malaysian ringgit to a nine-year high, supported by the view that the Japanese yen's weakness will be discussed at this week's Group of Seven meeting.
Yet the rallies were brief and most currencies failed to gain more than 0.25 percent, amid doubts about whether there will be any consensus on the yen among the wealthy nations.
The G7 finance ministers and central bankers meet in Essen, Germany, on February 9-10. European officials have called for a debate on the yen's weakness but Japanese and US officials have shrugged off the issue. US Treasury Secretary Henry Paulson said last week he was satisfied the yen's value was set in competitive markets.
Short-covering in the run-up to the G7 boosted the yen but the currency stalled around the 120 per dollar level. The South Korean won similarly met resistance around 932 per dollar, its highest in a month. "We see this as presenting a dollar-buying opportunity," said ING Bank economist Tim Condon. Paulson's comments last week indicated the Europeans would probably not find any backing for their criticism of the weak yen, Condon said.
"The fundamentals in Japan are yen-negative, so we see this as a transitory bout of G7-induced strength," he said. So, even though Asia had benefited from the bouts of yen-buying this week, that trend would reverse after the G7 meeting, Condon said. The ringgit firmed decisively past 3.5 per dollar to hit 3.4936, its strongest since early 1998, helped by what traders said was the surprising absence of dollar-buying intervention from the central bank, Bank Negara.
But it settled around 3.4950 in later deals, leading to speculation the central bank may have subsequently bought dollars. The ringgit, among Asia's top gainers so far in 2007, had met heavy resistance around 3.5 since mid-January and that supported the market view that Bank Negara was buying dollars to rein in the currency.
Suresh Ramanathan, head of market economics and strategy at Affin Investment Bank in Kuala Lumpur, said the central bank had soaked up around $3.27 billion of funds from the local market on Friday and a similar amount on Monday. "This suggests that the inflows into the market are on a scale Bank Negara possibly cannot handle.
"They had to let the currency strengthen further," Ramanathan said. Besides, if the central bank had stopped the currency from firming past 3.5 per dollar despite the rise in other Asian currencies and inflows into Malaysia, it would have signalled that the Malaysian authorities were targeting a specific level for the currency.
Such a signal would attract more speculative foreign capital, he said. Malaysia's central bank chief, Zeti Akhtar Aziz, said on Monday the authorities had no set targets for the ringgit. On Tuesday she said she was pleased with the "orderly" movement of the currency.
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