The South Korean won rose to a fresh nine-year high on Thursday on sustained selling of dollars by exporters, despite more verbal intervention by the authorities to cap the currency.
Other Asian currencies took a breather from a three-week rally after a firm US jobs report and nervousness ahead of a European Central Bank meeting propped up the dollar. Still, the dollar was not far from 20-month lows against the euro and four-month lows against the yen and most Asian currencies stayed near multi-month or multi-year highs.
The won initially shed a quarter of a percent to levels around 920 per dollar but soon rallied to 912.6 per dollar, its strongest since October 1997 which took its gains this year to nearly 11 percent.
The won has rallied despite several warnings and dollar-buying intervention by the Korean authorities. Bank of Korea officials have referred to the state of the currency market as "abnormal".
On Thursday, the central bank kept Korea's overnight policy rate unchanged at 4.5 percent but said banks would have to maintain a higher reserve ratio of 7 percent on foreign currency deposits from December 23. That rise in the reserve ratio from the current 5 percent meant that banks would have to set aside $260 million more, it said.
"The won's rise is due to carry trades and overhedging. The central bank recognises that," said Frederic Neumann, HSBC's regional economist. He said the higher reserve ratio seemed targeted at the yen carry trade, which are trades where investors borrow cheap yen and invest them in higher-yielding assets.
The Bank of Korea said last month it will investigate foreign currency lending by some banks. Analysts suspected that the investigation as well as Thursday's announcement of a rise in the reserve ratio was to curb the flow of such yen funds into Seoul's property market and ease the upward pressure on the won.
The won continued rallying despite these measures. Analysts at ABN Amro Bank said the won's sharp rise was due to dollar-selling by exporters. Several exporters had structured hedging transactions that were terminated once dollar/won fell to levels between 920 and 925.
With those levels hit, Korean exporters found themselves exposed and so rushed to sell dollars to re-establish a hedge, ABN's Shahab Jalinoos said in a note to clients. The won rose 1.3 percent from Tuesday's lows near 927.90 to Wednesday's peak near 915.70. "Given that it is hard to guess how far this has to run, we still advise against trying to call a bottom on dollar/won," Jalinoos wrote.
Elsewhere, the Thai baht was quoted around 35.60 per dollar. Its rally was capped at an eight-year high around 35.56 this week by Bank of Thailand measures tightening currency trading regulations. The Singapore dollar hit a 9-year high of 1.5362 per US dollar on Wednesday and was trading about 0.15 percent weaker. "From our perspective, this is just a bit of consolidation," said Callum Henderson, head of currency strategy at Standard Chartered Bank.
"The bias is still lower for dollar/Asia," he said. Suan Teck Kin, economist with United Overseas Bank, said he expected the Malaysian ringgit Indian rupee and Taiwan dollar would appreciate faster in the coming weeks, given these had under-performed the rally so far and that central banks would rein in others such as the baht and won.