Asian currencies rallied to multi-week highs on Friday as the US Federal Reserve gave the clearest signal yet that it was close to ending a two-year credit-tightening campaign. The Fed delivered an expected quarter-point rise in its key rate to 5.25 percent on Thursday and said slowing economic growth should help contain inflation.
That news cheered Asian currency markets, which had braced for a hawkish policy statement and a strong indication that rates would rise again at the Fed's August meeting.
"Before the FOMC, the market got ahead of itself and built up pretty sizeable long-dollar positions against Asian currencies," said Alvin Cheng, a trader at Bayerische Hypo und Vereinsbank in Hong Kong. "But we have had dovish comments from the Fed and that has triggered a lot of dollar selling as people get out of their long positions," Cheng said. The South Korean won rose nearly 1.3 percent to about 948.20 per dollar, its strongest in three weeks.
The Taiwan dollar and the Indonesian rupiah both added nearly 1 percent from levels seen in late Asian trade on Thursday, hitting three- and four-week highs, respectively. The Philippine peso also climbed almost 1 percent, rebounding sharply from six-month lows hit this week.
The Thai baht marked its highest level in more than three weeks at around 38.12 per dollar, up about 0.9 percent from late trade on Thursday. Worries about further increases in US interest rates have been a key driver behind a sharp sell-off in emerging markets since mid-May. But traders said Friday's sharp gains had pushed most Asian currencies through key chart levels.
A broad-based rally in regional stock markets also helped boost Asian currencies, along with a nearly 1.5 percent jump in the yen against the dollar. Despite solid gains in regional currencies, some analysts said it was too early to say their recent weakness was over. But for now, those Asian currencies such as the Indian rupee and the Indonesian rupiah that have under-performed during the sell-off could now outperform, analysts said.
The Malaysian ringgit was trading at 3.6765 per dollar, stronger than late Thursday's level of 3.6840. Currencies in the region got further support from a rise in the Chinese yuan. The yuan rose as high as 7.9925 yuan to the dollar - its highest level since it was revalued in July 2005.
Ben Simpfendorfer, a Hong Kong-based strategist for Royal Bank of Scotland, said yuan non-deliverable forwards (NDFs) were pricing in speedier gains in the yuan after the Fed meeting. "There is no big surprise there", he said. The one-month NDF was quoted at 7.9670 yuan per dollar. It briefly rose to 7.9630, the strongest level since mid-May.
Other factors such as the US Senate, which on Wednesday confirmed Henry Paulson as the new treasury secretary, might be making the market slightly positive towards pricing in further appreciation in the yuan as well, Simpfendorfer said.
Paulson said this week the yuan's value should be set in open markets - effectively extending a policy position the current US administration has advocated for the past several years.