China's yuan stayed weak for most of Monday, defying a Group of Seven nations' statement singling out the currency in their call for more flexible exchange rates and reining in the South Korean won, Singapore dollar and other Asian currencies at multi-year highs.
The yuan's early weakness baffled traders, particularly as the Japanese yen surged to 3-month highs around 115 per dollar, and prompted some to speculate the Chinese central bank was intervening to stop the yuan from rising.
The central bank fixed the central point of the yuan's trading band for Monday at 8.0185 per dollar, weaker than Friday's close at 8.0170.
Group of Seven finance ministers and central bankers said in a communique on Friday "greater exchange rate flexibility is desirable in emerging economies with large current account surpluses, especially China, for necessary adjustments to occur".
In a separate one-page statement on global economic distortions, the officials said more flexibility and a rise in China's currency were "critical" as was the need for the Asian giant to rely less on exports and more on domestic demand.
People's Bank of China Governor Zhou Xiaochuan later told reporters the yuan could probably begin to rise a bit faster but that gradualism was the guiding philosophy.
"The message is clear. They don't want the market to get carried away with the notion of a rapid appreciation," said Sean Callow, Westpac Bank's currency strategist.
Yet, Zhou's comment was significant, Callow said, and that was why expectations of accelerated gains in the yuan in the future was leading to speculative purchases of Asia's more liquid currencies, such as the won and Singapore dollar.
The Singapore dollar briefly hit 1.5890 per US dollar, its strongest since May 1998, and then settled to around 1.5912/16, nearly half a percent firmer than Friday's levels.
The Indonesian rupiah rose to its strongest level since July 2004, while the won was up 1 percent from Friday at around 939 a dollar.
"I still see hot money coming in on the back of stock and bonds purchases. The high yield in rupiah still attracts offshore investors to short term assets," one Jakarta-based trader said of the rupiah's rally.
The Philippine peso continued to buck the regional uptrend. It weakened further to 51.75 per dollar, its weakest in 2 months, and ended local trade off that low. "There's some month-end corporate demand from oil firms and the manufacturing sector," Amando Tetangco, the Philippine central bank Governor said, when asked about pressures on the peso.
Many analysts also saw the G7's reference to global imbalances as a clear message that the US dollar needed to weaken, more so against the yuan and other Asian currencies.
It also meant that the US Treasury's semi-annual report on currency practices of its trading partners was likely to label China a manipulator, they said. "The G7 statement is more than just a message to China. It is a message to all central banks that intervene over long periods of time to maintain their currencies at non-market driven levels," said HSBC's currency strategist Richard Yetsenga.
Yetsenga said the Thai baht and won were his picks since they were backed by strong economic fundamentals.
Deutsche Bank's currency strategist James Malcolm said the won was likely to be a favourite among investors in Asia because of its liquid markets and its higher volatility. Yet, he also said, Zhou's comments indicated China was unlikely to respond to the G7 calls and let the yuan rise rapidly.
"It is a medium-term positive for Asian currencies. It is signalling more pressure from the policy perspective," Malcolm said, referring to the G7 statement.
"But as a short-term signal, it is likely to be pretty weak."