SINGAPORE: Asian currencies edged lower on Tuesday, with the South Korean won sliding to its lowest level in a month and the Indian rupee hitting a record low, as the euro zone's debt crisis and dollar funding strains left investors with little appetite for riskier assets.
The won fell to as low as 1,150.9 to the dollar at one point, while the rupee skidded to a record low of 52.73 .
Market players said emerging Asian currencies were likely to remain vulnerable in the near term as the European crisis deepens.
"This is not a move limited to just Asia, but what I have heard is that money is being pulled out because European investors' risk tolerance has fallen," said a trader for a Japanese bank in Singapore. The trader added a caveat, saying he had not actually seen such flows himself.
It may take some time for Asian currencies to stabilise, the trader said, especially given recent signs of rising dollar funding costs, a situation that may not settle down at least until year-end funding needs are taken care of, he said.
In a sign of such dollar funding strains, the one-year euro/dollar cross currency basis swap widened to a bid rate of minus 94.8 basis points at one point on Tuesday.
That implies that the cost of borrowing dollars in exchange for the euro as collateral using basis swaps rose to their highest level since the days of the global financial crisis, in late 2008.
While Asian assets face a downdraft from growing risk aversion, one encouraging sign is that demand for Asian bonds has proved resilient, said Nick Verdi, Asian FX strategist for Barclays Capital in Singapore.
"In equity markets, we are now seeing fairly large outflows particularly in Korea and Taiwan, but I think more important is that bond inflows are holding up throughout the region," Verdi said.
"The risk to Asian assets comes more from a generalised rise in risk aversion, rather than something more structural which will cause the permanent reversal of the flows that were seen in recent months and years," he added.
Underscoring a broad drop in Asian currencies on Tuesday, the Thai baht and the Malaysian ringgit both touched their lowest levels in about seven weeks.
INDIAN RUPEE
One currency that could continue to underperform is the Indian rupee, said Barclays Capital's Verdi, adding that India's current account deficit and lack of capital inflows bode ill for the currency.
"These two factors in particular make the rupee a bit more sensitive to sudden changes in risk sentiment globally," he said.
The rupee skidded to an all-time low on Tuesday as oil refiners and other companies scrambled to buy dollars.
One trader said there was "small buying" of the dollar versus the rupee by offshore institutional investors during the rupee's slide on Tuesday.
INDONESIAN RUPIAH
The rupiah last stood at 9,050 to the dollar, dipping about 0.3 percent. It had slipped to as low as 9,070 the previous day, nearing a trough of 9,080 hit in late September.
A trader for a European bank in Jakarta said the rupiah remained under pressure on Tuesday in the wake of its slide in the non-deliverable forwards market the previous day.
There were some flows from real money investors on Monday "in sizeable amounts", the trader said.
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