The Thai baht and the Philippine peso on Tuesday led gains in their peers on continuous bond inflows to Asia, while investors remained reluctant to add more positions in the regional units on default threats in the eurozone and the United States.
Worries about debt-deals are expected to prevent investors from increasing exposure to riskier assets, including emerging Asian currencies, dealers and analysts said.
"AXJ's rebound is looking more like a 'dead cat bounce'... This recovery looks rather shallow, and very reflective of the market attempting to find some reprieve in Asian units given the uncertainty this week for the US and the euro zone," said Suresh Kumar Ramanathan, regional rates and foreign exchange strategist for CIMB Investment Bank in Kuala Lumpur.
Still, emerging Asian currencies are still attractive in the longer term, given problems of the two major developed markets, analysts said. "If they keep having emergency euro zone meetings but with nothing out of it Some market players may be buying CHF and JPY (against the euro and dollar) for risk aversion hedging and getting AXJs for upside," said Saktiandi Supaat, head of FX Research at Maybank in Singapore.
The baht is expected to rise more, probably to May's high of 29.84 per dollar, as realisation slowly dawns on the catch-up play in Thailand.
Thai central bank is expected to take more steps to stem inflationary pressure, analysts said. Bank of Thailand was earlier spotted buying dollars to curb the baht's strength, but then it disappeared, dealers said.
DBS believes the baht is likely to strengthen against the Malaysian ringgit as the Thai central bank raises interest rates more while its Malaysian counterpart holds off on similar action. "The THB has scope to appreciate against MYR when the BOT started to narrow its policy rate differential with its Malaysian counterpart," DBS said in a note.
The baht had been the worst performing emerging Asian currencies this year, amid domestic political uncertainty. After the July 3 Thai election raised hopes that political tensions would ease, the baht has strengthened. It now has risen 0.9 percent against the dollar this year, outpaced the Indian rupee.
The Philippine peso appreciated past 42.88 per dollar, the 76.4 percent Fibonacci retracement level of the dollar/peso's rise between May and June. A higher balance-of-payments surplus provided more support to the peso.
Earlier, Goldman Sachs revised up forecasts for the won, based on a brighter outlook for South Korea's balance-of-payments and the likelihood of rate rises because of strong inflation pressures.
Goldman said it sees dollar/won at 1,040 at three months (compared with 1,060 previously), 1,030 at six months (compared with 1,050) and at 1,010 in 12 months' time (rather than 1,040). The rupiah steadied as bond inflows offset dollar demand from corporates and local banks.