Asian currencies pared day-earlier gains on Tuesday as initial excitement over the US government's seizure of its two troubled mortgage giants gave way to worries over economic growth. The US dollar hit a one-year high against a broad basket of currencies, boosted by the government's plan announced late on Sunday to bail out Fannie Mae and Freddie Mac.
The news had sparked a revival in risk appetite and confidence in the financial sector to boost Asian currencies and stocks on Monday. That all but evaporated by Tuesday. The South Korean won was the worst hit.
After rising the most in a decade on Monday, it declined almost 2 percent on Tuesday, hit by a combination of the dollar rally, a 1.8 percent drop in Korean stocks and fears about capital flight as a huge chunk of foreign debt holdings matured. The Thai baht fell a modest 0.3 percent to a one-year trough of 34.62 as markets awaited a court ruling on whether Prime Minister Samak Sundaravej's hosting of a television show was a conflict of interest. If found guilty, he will have to step down from office. Most investment banks said they would remain short Asian currencies against the dollar for the next few months.
"The trend remains broadly higher for dollar/Asia given the prospect of slowing growth," said Callum Henderson, head of currency strategy at Standard Chartered Bank. Henderson said that while US policy had been extremely strong in dealing with the economic and financial problems, policy was comparatively paralysed outside of the United States, notably in Europe. "In Asia, central banks are still faced with at least some inflation threat. That has to be dealt with first before they can adopt more pro-growth policies," he said.
Market concerns that Asian central banks have not been tough enough on inflation has dragged on the region's currencies, and some analysts even suspect authorities are deliberately choosing to keep their currencies weak in order to prop up flagging exports. Despite frequent dollar-selling intervention by their central banks, the won has fallen 9 percent against the dollar in two months, while the Philippine peso has shed 4 percent in a month. The peso was trading at 46.75 per dollar on Tuesday.
Jonathan Ravelas, a strategist at Banco De Oro Universal Bank in Manila, also expected worries about a deteriorating US economy would overshadow the relief rally that followed the government take-over of Fannie Mae and Freddie Mac. "For dollar/peso, the near-term risk still lies at the 47.00-47.12 levels on corporate demand and the continued strength of the greenback against regional currencies," Ravelas said.
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