Most emerging Asian currencies rose on Thursday as the dollar lost ground after the US Federal Reserve did not provide strong signals on a near-term interest rate hike, while caution grew ahead of Japan's central bank policy decision. South Korea's won hit a none-month high on stock market inflows. The Taiwan dollar rose to its strongest in nearly two weeks as foreign investors continued buying local shares.
The yuan advanced to three-week peaks as China's central bank set another stronger daily guidance rate to reflect broad weakness in the US dollar. The Fed said on Wednesday after a two-day policy meeting that it was less concerned over possible shocks to the US economy, suggesting that a hike as early as September was not off the table. Still, the US central bank gave no firm indication of whether it would raise rates at its next policy meeting in September.
"The Fed performed as we expected by shrugging off any Brexit-related concerns and acknowledging the mild improvement in the economy, while also not telegraphing any explicit and undue zealousness for a September hike," Emmanuel Ng, foreign exchange strategist at OCBC Bank, said in a note. "We remain positioned against the greenback." The next focus is the Bank of Japan's monetary policy decision on Friday.
Japan's Prime Minister Shinzo Abe unveiled a surprisingly large $265 billion stimulus package on Wednesday, adding pressure on the central bank to match the measures with monetary stimulus steps. Traders widely expect the BoJ to add to its already massive asset purchases and possibly take interest rates deeper into negative territory. Further easing in Japan could encourage a recent trend whereby investors are seeking higher yields in emerging Asia.
Emerging markets portfolio inflows rose to almost $25 billion in July from $13.3 billion in June, the Institute of International Finance said on Wednesday. Emerging Asia attracted the lion's share of the flows, with $19.1 billion. Yen moves and political considerations could be decisive factors for the BoJ, which would prefer to conserve its limited ammunition in case the Japanese economy takes a turn for the worse.
Still, some analysts warned of possible disappointments. "We will see how BoJ surprises, mostly disappoints." said Andy Ji, Asian currency strategist for Commonwealth Bank of Australia in Singapore.
"USD/Asia will be caught between knee-jerk reaction to a lower USD/CNY and diminishing stimulus hope," Ji said, adding emerging Asian currencies are likely to weaken eventually if the BoJ falls short of market expectations. A Citi survey of its clients and financial institutions earlier this month showed 80 percent expected the dollar to fall more than 3 percent against the yen if the BoJ stands pat on Friday and does not signal any action in September. More than 30 percent think the drop would be more than 4 percent.
The won advanced as much as 0.9 percent to 1,124.2 per dollar, its strongest since October 23. Foreign investors were set to extend their buying spree in Seoul's main stock market to a 16th straight session. They bought a combined net 3.7 trillion won ($3.3 billion) worth of equities during the period.
South Korea's foreign exchange authorities were suspected of intervening to stem its upside around the session high, traders said. The won may strengthen to 1,120.6, its high in October last year, if it ends the day firmer than a major chart resistance area of 1,125-1,130, analysts said. The ringgit tracked gains in regional peers, while low crude prices underscored worries about Malaysia's oil and gas revenues. Some of Malaysian government bond prices also slid. The Taiwan dollar rose 0.4 percent to 31.948 per the US dollar, its strongest since July 15.
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