The Philippine peso gave back its early gains while other Asian currencies barely moved on Monday in trading thinned by a Japanese holiday and nervousness over the extent of a US interest rate cut. Most analysts and traders expect the Federal Reserve to cut the fed funds rate when it meets on Tuesday.
The dollar has been undermined in recent weeks by expectations for a 50 basis-point cut in the policy rate, although it steadied on Monday as more market participants took the view the Fed would be cautious and cut by a more modest quarter of a percentage point.
With Japanese markets closed, the dollar was lacklustre and stayed close to record lows against the euro. It was steady against the yen, hovering around 115.0-115.25 yen per dollar. Asian currencies had risen gradually last week, helped by the dollar's broad weakness as well as a reduction in negative news from the credit markets.
But confusion over what the Fed will do weighed on the regionals on Monday. The peso hit 46.12 per dollar, rising nearly 0.4 percent from its previous close, but pared gains later to end at 46.39. The Indonesian rupiah was steady around 9,380 per dollar, the Singapore dollar shed a quarter of a percent to hit 1.5160 per US dollar and the Korean won stuck to a 928-929 per dollar range.
The Aussie hit a five-week high, showing that some investors were picking up high-yielders, yet sterling was undermined by risk aversion stemming from troubles at UK mortgage lender Northern Rock.
"Carry trades are coming back into style and that should suggest that people are getting more confident, which means they must be expecting something from the Fed," said Marshall Gittler, chief Asian strategist at Deutsche Bank's private wealth management.
Gittler said markets seem to have positioned for at least a quarter point cut in the fed funds rate, accompanied by promises of more easing. "Even if they deliver 50 basis points with no promise of anything in the future, or 25 bps without a very strong promise of more in the future, I think there will be disappointment," he said.
In a note to clients, J.P. Morgan Chase urged caution about Asian currencies even though foreigners had shown signs of renewing their interest in the region, saying "market pricing for a 50 bps Fed ease is to our view looking too rich".
Citigroup said it was misleading to assume that a fed rate cut would boost US and Asian economic growth and therefore boost the region's current accounts and currencies. "In the likely scenario that the rate cuts are not sufficient to prevent slowing of the US economy, Asian growth would slow and Asian currencies would weaken," Citigroup economist Yiping Huang said in a note.
"The overall conclusion from this exercise is that Fed cuts are positive for Asia. But until the outlook for the US economy becomes more certain, we should stay cautious on Asian asset prices," Huang wrote.