The Korean won jumped to a seven-year high and the Philippine peso rose to its highest in a year on Thursday, as rising rhetoric ahead of next week's Group of Seven nations' meeting boosted the Asian currencies. The won stalled around 1,027 a dollar, a November 1997 peak, and the Sing dollar bounced off levels close to 1.63 per dollar as regional currencies reacted to fluctuations in the offshore Chinese yuan forwards and statements ahead of the February 4 and 5 G7 meeting. China has been invited to talks with the G7.
Simon Flint, currency strategist with Bank of America, said the volatility would persist until next week.
"You will get rhetoric from G7 stressing the burden-sharing and the need for flexibility in places there isn't any, particularly China, and you will have some impact on non-Japanese Asia as well," he said, referring to the growing calls from the United States and Europe for Asia to help correct global imbalances arising from the huge US trade deficit.
"But you will continue to hear comments from the Chinese officials trying to dampen down expectations of how soon they will make any change," he said.
"You would expect the rhetoric to create some choppiness in markets."
The regional currencies found support in US President George W. Bush's comment on Wednesday that countries should let market forces determine the value of their currencies and that the United States was working with China on the issue.
European Central Bank governing council member Nout Wellink said Asian central banks could not keep buying dollars forever, referring to Asia's intervention to hold back currencies.
Meanwhile, news that China's central bank chief Zhou Xiaochuan will attend talks with the G7 officials when they meet in London on February 4 and 5 propped up yuan offshore premiums.
Chinese yuan non-deliverable forwards - derivatives used to speculate on currencies - showed one-year premiums on the yuan moving between 4,100 and 3,950 points, pricing in an appreciation of between 5.2 and 5.0 percent.
Traders said the won rose partly as the Korean authorities had difficulty intervening to rein it in. Rising yields in the local debt market restrained them from issuing more bonds to offset the intervention.
"They are struggling with the back-up in interest rates. They are absolutely hamstrung in terms of being able to intervene in any big way," one analyst said.
"The only saviour is that it is very difficult for the market to sell dollar/won when yen/won is below 10."
The rising won has caused the yen-won cross rate to fall to its lowest levels since August 2003. The cross hit 9.87 won per yen on Tuesday and stayed below the sensitive 10 level on Wednesday and Thursday.
Currency analysts believe Korean authorities, keenly conscious of the won's competitiveness in export markets versus the yen, prefer to see the cross rate stay above 10 won per yen.
And that posed a dilemma for markets, on whether to sell the won expecting it to slide versus the yen or to buy won on the belief the Koreans could not intervene heavily. Elsewhere, the Philippine peso extended its new found strength to hit 55.13 per dollar, its strongest since January 2004.
Traders said the peso furthered its rally after lead managers for a Philippine 25-year sovereign bond issue managed to sell $1.5 billion, against a targeted $1 billion, and at a lower yield than initially indicated.