The Philippine peso hit a fresh 7-1/2-year peak, the Malaysian ringgit rose to a decade high and other Asian currencies rallied on Tuesday, buoyed by the yuan's gains after Chinese inflation jumped to an 11-year record.
Asians markets also got a boost from improving investor risk appetite after recent US data allayed fears of a severe slowdown in the economy and led to reduced expectations of Federal Reserve monetary easing.
Investors now expect the Fed to cut rates by only 25 basis points when it meets later on Tuesday, although they are keen to see how the Fed views risks to growth and inflation.
The yuan hit 7.377 per dollar, its highest since the July 2005 revaluation, after data showed Chinese inflation in November was the highest since late 1996 and the central bank set the reference mid-point rate at its strongest since July 2005.
The Governor of the People's Bank of China, Zhou Xiaochuan, also said on Tuesday the currency would be made more flexible in 2008. He said it was important to look at the yuan's value against a basket of currencies, not just against the dollar.
Non-deliverable forwards moved to price in a higher premium on the yuan. One-year NDFs were quoted at 6.76 per dollar, pricing in a more than 9 percent appreciation in the yuan in a year. In November, the extent of expected appreciation has crossed 10 percent.
"It is pricing in 9 percent appreciation but we've seen it at 10 percent last month," said Kenneth Kan, a trader at the Royal Bank of Scotland in Hong Kong. "This week, we have a high CPI and US-Sino talks which will keep the dollar/yuan NDFs offered for the early part of the week," he said.
That would also appease Washington which has been clamouring for a higher yuan as a way to resolve global trade imbalances and reduce China's soaring trade surplus with the United States.
US Treasury Secretary Henry Paulson, Commerce Secretary Carlos Gutierrez, US Trade Representative Susan Schwab and acting US Agriculture Secretary Chuck Conner are in Beijing between Tuesday and Thursday to hold talks on trade, food safety and other issues.
"The impression remains that China's policy makers are running hard merely to keep up with the economy," J.P. Morgan Chase said in a note. "The case for accelerated yuan appreciation continues to build - with or without Paulson's visit to Beijing."
Kan said other Asian currencies might also feel the appreciation pressure, alongside the yuan, at least until the end of this week. That was unless the Fed surprised markets, he said.
"I think we might stay heavy till the end of the week, unless the Fed does something that will cause the Dow Jones to fall 200 points and Libor spreads go back up," he said, adding that would then cause China's share market to decline.
On Tuesday, the Malaysian ringgit hit a 10-year high and the peso continued its march upward, reaching a 7-1/2-year high of 41.40 per dollar. The ringgit has been steadily appreciating since November 22 and has risen 2 percent since then to hit 3.308 per dollar on Tuesday.
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