The Indonesian rupiah and other high-yielders rallied and stock markets in Asia gained on Monday as investors returned to riskier trades, albeit with caution as the flow of bad news from the subprime mortgage sector continued.
The Japanese yen fell broadly, another indication that investors had resumed sales of cheap yen to fund purchases of higher-yielding assets through carry trades.
But markets remained skittish. Traders said stocks were rising but on low volumes. The rupiah gained 0.45 percent but found resistance around 9,370 per dollar.
The South Korean won rose by a similar amount to levels near 937 per dollar and then stalled. Other currencies such as the Taiwan dollar and Thai baht were little moved.
"There is a lot of caution. Most people don't think this is over," said one trader in Singapore, referring to the US subprime mortgage problems behind the month-long turbulence in stock and credit markets.
On Monday, Hong Kong-listed China Construction Bank said it held $1.062 billion of US subprime-mortgage-loan-backed securities at the end of June, although it expected limited impact from those holdings on its results for the year.
Late last week, four of Asia's biggest banks, including Singapore's DBS Group Holdings and Bank of China, revealed larger-than-expected subprime exposure. "Generally speaking, it is probably too early to conclude an end to the risk aversion story, and in all likelihood, more nightmare stories will emerge," said Sue Trinh, a strategist at RBC Capital Markets in Sydney. "But at the same time, I think positioning is a lot better balanced now which works in favour of the idea that the worst of the panic selling is over."
Analysts have so far stuck to their view that any impact on Asian currencies and other assets would be limited, and that regional growth would not suffer much unless the US economy flirted with recession.
Friday's US durable goods orders were better than expected. But analysts expect to get a better idea of the US economy this week, when existing home sales data and the minutes of the Federal Reserve's August meeting will be released. Trinh said the US dollar had benefited so far in the sell-off when carry trades were being liquidated. But it could now come under renewed pressure.
"We like the Singapore dollar in that environment. The Monetary Authority of Singapore has a big inflation nightmare on its hands," she said. Singapore's annual inflation rate doubled in July from June but that only took it to 2.6 percent.
Citibank economist Anton Gunawan said the outstanding amount of non-resident ownership of Indonesian bonds was only around $2 billion, after foreigners had sold about $3 billion of those bonds in the past few weeks.
Therefore, there would not be much pressure on the rupiah to depreciate, Gunawan said, predicting the rupiah would appreciate to 9,250 in three months. ING economist Tim Condon said the won's losses, too, would be contained, despite the Bank of Korea's apparent desire to see it weaken further.
BOK Deputy Governor Rhee Gwang-ju told Reuters on Friday the won was in the early stages of its decline and was still overvalued. The currency is now nearly one percent weaker than at the start of the year. "We consider this wishful thinking," Condon said in a note.