Most Asian currencies ended a three-session rally on Wednesday, dropping from multi-week peaks after news that North Korea had launched several missiles stoked concern about geopolitical risk, spooking traders and investors.
The Japanese yen fell against the dollar and hit a record low against the euro, while the South Korean won eased more than a quarter of a percent to near 949 per dollar after Pyongyang fired at least six missiles.
But the yen recovered as the focus returned to interest rates, with the Bank of Japan widely expected to raise rates next week, its first such move in six years.
The yen's gains failed to inspire other Asian currencies, however, with the Taiwan dollar, Thai baht and Philippine peso all shedding more than a quarter of a percent. Most Asian stock markets took a knock but they bounced back from early lows towards the close of Asian trading.
"Risk appetites had been recovering in the preceding sessions and the event has so far not triggered an outright reversal," said J.P. Morgan in a report, referring to the missile launch. South Korea's second vice finance minister in charge of international affairs, Chin Dong-soo, said the authorities would take any action necessary to stabilise the foreign exchange market if it turned volatile due to the missile launch.
The comments helped sentiment and the won trimmed its losses. "Although the political language from the United States and Japan in response to this event has been hawkish so far, we suspect the Korean won impact will be limited by BOK action to support the won if necessary," said Shahab Jalinoos, a currency strategist with ABN Amro Bank.
The United States said it would discuss hauling North Korea before the United Nations Security Council, a move that could pave the way for UN sanctions on North Korea. Japan said it might consider economic sanctions against North Korea while South Korea's Yonhap news service said the South Korean military had stepped up its alert level.
Traders said the market was slowly turning its attention back to economic data and policy moves by various Asian central banks. The Bank of Japan is expected to raise interest rates by a quarter of a percentage point from zero next week, a move that could give the yen and other Asian currencies a boost.
"There is also the non-farm payrolls data expected from the United States. Also, rate-setting meetings are expected in South Korea and Indonesia this week and these factors are likely to grab attention," said a foreign exchange trader in Singapore.