Asian currencies firmed strongly on Wednesday, propelled by the prospects of falling US interest rates, with some hitting their strongest levels since 1997. The Singapore dollar rose as far as 1.3979 as the US dollar slumped to a record low against the euro and a basket of major currencies.
It marked the first time that the Singapore dollar had pierced S$1.4 since January 1997, just before the Asia financial crisis. The Singapore dollar was also supported by expectations the central bank needs a stronger currency to curb price pressures. Data on Monday showed the island's annual inflation accelerated to a 25-year high of 6.6 percent in January.
The Singapore dollar gained almost half of a percent on Wednesday, bringing its appreciation versus the US currency so far this year to 2.9 percent. The Malaysian ringgit rose as far as 3.201 per dollar, up about 0.3 percent and its highest since late 1997. The Thai baht briefly hit 32.09 per dollar, up half of a percent to its highest since August 1997.
"The dollar/baht is still heavy from exporters' dollar sales plus expectations about lifting capital controls," said a trader in Bangkok. Investors believe Thai authorities will soon scrap capital controls imposed in late 2006, which were designed to curb the baht's strength to protect local exporters.
The Bank of Thailand kept its policy interest rate steady at 3.25 percent on Wednesday, as expected. The Thai rate - the lowest in emerging Asia, is still higher than the US fed funds rate, which has fallen rapidly to 3 percent.
The Indonesian rupiah hit 9,037 per dollar, up almost 0.6 percent from late Asian trade on Tuesday. "Unless there is another wave of inflows today, the rupiah should retrace a bit," said a trader in Jakarta.
The dollar slumped after weak economic data and comments from a Fed official signalled that US interest rates will continue to head lower. Fed Vice Chairman Donald Kohn said on Tuesday that a weak US economy was a bigger worry than higher inflation risks.
Fed Chairman Ben Bernanke is expected to provide a similar message when he presents the central bank's twice-yearly monetary policy report to Congress on Wednesday and Thursday. In Asia, inflation risks are likely to prod policy makers to tolerate stronger currencies to curb import costs, fuelled by lofty oil prices, analysts said.
"The driver for Asian currencies is a combination of a Fed being backed into further cuts amid a climate of rising global inflation," said Claudio Piron, currency strategist at J.P. Morgan. "Singapore is uniquely positioned in that its FX rate is the tool of choice in combating inflation and is widely seen as credibly applied," he added.
But he cautioned that Singapore's central bank would keep intervening in the market to ensure currency rises are gradual. The Taiwan dollar hit a three-year high at 30.903 per US dollar amid fund inflows, bringing its gains this year to 5 percent, overtaking the baht as Asia's top performer.
The Chinese yuan rose to 7.1450 per dollar but was still off its post-revaluation high at 7.1413 hit last week. Many analysts expect China to let the yuan rise around 10 percent this year, compared to 6.9 percent in 2007, to fight inflation, which hit a 11-year high of 7.1 percent in January.
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