Asian currencies, many ending their worst year this decade, gained on the weakening dollar on Wednesday in a brief year-end respite from a sell-off that investors expect will resume in 2009. Non-deliverable forward (NDFs) contracts showed investors betting most of the nine emerging Asian currencies tracked by Reuters would be weaker in three months.
Asian currencies were buffeted by waves of capital that poured out of regional stock and bonds as the global financial crisis triggered by US mortgage defaults and bank failures spooked investors into a flight to safer assets.
Central banks around the region reversed a decade-old policy of encouraging currency weakness to support exports and moved to sell dollars as exchange rates came under pressure unknown since the Asian financial crisis in 1997/98. Analysts expect central banks stand back next year and allow weaker currencies to boost exports in the face of a recession across the industrialised world.
The dollar sales had relatively little impact, apart from depleting Asian reserves. For three of the nine currencies - Malaysia's ringgit, India's rupee and South Korea's won - 2008 was the worst year since the Asian crisis. Indonesia's rupiah suffered it biggest slide since 2001 and the Philippine peso fell the most since 2000.
"For Asian FX, I think there will be more downside in the first half of 2009 as we expect a second bout of deleveraging to take place," said Vishnu Varathan, an economist at FORECAST in Singapore. "And given that any meaningful recovery in Asia's growth outlook will take some time, we can expect that Asian currencies may be a bit slow off the blocks." Currency markets in South Korea, Indonesia, Thailand and the Philippines are closed for year-end holidays on Wednesday.
Currencies that were traded extended gains against a dollar that abruptly ran out of steam in December as flows from investors repatriating capital from riskier markets began to dry up. The Taiwan dollar gained almost 0.4 percent to 32.736 per US dollar - its highest since December 22. The Malaysian ringgit hit one-week high of 3.465 per dollar.
"In the short run, Asian currencies will depend on the dollar's performance against majors and we can expect the dollar to stay reasonably strong against majors," said a trader in Kuala Lumpur. The index that tracks the dollar's movements against major currencies such as euro and yen has fallen almost 6 percent this month, but is still up more than around 10 percent from a life low in March.
The ringgit has gained about 4 percent against the dollar this month, regaining ground with most Asian currencies as interest rate cuts and cash injections by central banks world-wide boosted stocks. The South Korean won suffered the biggest losses and has staged the most dramatic rebound, ending the year with a 25 percent annual decline after a 16.6 percent rally in December.
The tightly controlled Chinese yuan was emerging Asia's best performer, rising as far as 6.8240 per dollar - its highest since November 13 - to bring the full-year gain to 7 percent. Three-month non-deliverable Korean won forwards hovered near 1,325 per dollar, implying a 5 percent fall from Wednesday's spot rate. NDFs in the Indonesian rupiah and Malaysian ringgit implied declines of almost 3 percent and 0.2 percent from the spot rate, respectively.
Three-month yuan NDFs yuan eased slightly to 6.95 per dollar, implying a fall of almost 2 percent from Wednesday's spot rate. Analysts generally believe the yuan would regain steam against the dollar as the economy recovers thanks to monetary policy easing and fiscal stimulus. "We expect any signs of deflation via year-on-year contraction in headline CPI to be temporary and unlikely to destabilise current FX policy of maintaining stable and gradual yuan appreciation," analysts at Bank of America said in a note.
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