The Indonesian rupiah and Philippine peso bucked the firm tone of Asian currencies on Tuesday as markets pared US dollar holdings ahead of another expected rise in interest rates in the United States.
The Singapore dollar strengthened to around 1.6740/50 per US dollar, its strongest level in 2-1/2 months.
The Korean won rose three-quarters of a percent to around 1,025 a dollar. The sharp rises in these two currencies sparked bids for implied volatilities as markets braced for the sort of sharper price swings that had been absent for months.
The dollar has declined this week for several reasons, chief among them the worry that the Fed could pause in its rate tightening cycle after Tuesday's anticipated increase. The Fed is widely expected to raise its key rate for a 13th straight time to 4.25 percent.
Concerns that flows into the United States will slow, that investors may pick commodity currencies and sell the dollar, and worries over Standard & Poor's downgrade of US automaker General Motors Corp, undermined the US dollar.
Comments by a member of the Chinese central bank's monetary policy committee that Beijing was dangerously exposed to the dollar and needed to work with other East Asian economies to slow the rate of accumulation also weighed on the currency.
However, analysts said they would be wary of interpreting a pull back in the dollar as signalling the end of its sharp rally since September.
"We are seeing this as a temporary setback to the dollar," Sean Callow, Westpac Bank's currency strategist, said.
Westpac expects Asian currencies to rise in 2006. But this week's retreat in the dollar did not suggest the regionals had begun that rally, he said.
"We need a significant event for that turnaround in the dollar, particularly dollar/yen," Callow said.
The Philippine peso weakened to about 53.70 in local trading from Monday's close at 53.65, with traders citing a slowdown in remittances from overseas Filipinos that had driven the currency to 2-1/2 year highs last week.
The Indonesian rupiah was little changed on the day, staying around the 9,770/9,780 levels it fell to on Monday as markets booked profits on the currency's 3 percent rise last week.
Analysts said the currency was undermined by the realisation that last week's rally had been overdone and by the rise in crude oil prices to over $61 a barrel after the Organisation of the Petroleum Exporting Countries (Opec) paved the way to cut production early next year.
"For the moment, it appears profit taking is prompting the rupiah to relinquish its recent gains, while higher oil prices may also catch the market short of dollars, given Monday's Opec meeting has done little to resolve the global supply demand imbalance," J.P. Morgan Chase Bank said in a note to clients.
Other analysts said that at current levels the rupiah had already priced in the positives, including a government reshuffle and a rate rise last week.
Westpac's Callow said the markets were assuming a rosy picture for Indonesia in 2006, which included a benign outlook for oil prices and no major second-round impact of the large rate rises on the rest of the economy.