Most Asian currencies sagged on Wednesday as the dollar managed to hold firm after US Federal Reserve Chair Janet Yellen's testimony the previous day was seen as relatively balanced. Losses were led by the South Korea won, and the Malaysian ringgit. The won hit a 2-1/2 month low after comments from South Korea's finance minister and central bank governor increased expectations of a rate cut.
Data showing that China's economy grew slightly faster than expected in the second quarter helped the won trim some of its losses. The dollar's generally firm tone seemed to be spilling over into Asian currencies, said Masashi Murata, currency strategist for Brown Brothers Harriman in Tokyo.
"The general market sentiment is that the dollar is starting to show a bit of resilience...and some short-covering is taking place," Murata said, adding that there was some caution toward Asian currencies in the wake of their recent rally. Against a basket of major currencies, the dollar touched a one-month high on Wednesday. Market participants said Yellen's congressional testimony on Tuesday offered few fresh hints on the outlook for monetary policy and sounded relatively balanced. Yellen said the one thing that might prompt the Fed to raise rates earlier or faster is if hiring and wages take off in an unexpected way.
She added, however, that US labour markets are far from healthy and signalled the Fed will keep monetary policy loose until hiring and wage data show the effects of the financial crisis are "completely gone." "I think she wasn't as dovish as people expected," said Sean Yokota, head of Asia strategy for Scandinavian bank SEB in Singapore. "It's pretty much been same as what she's been saying before... The data is getting slightly better in the US and if the Fed's posture is remaining the same, if you add those together then it should be slightly dollar-positive."
Khoon Goh, senior FX strategist at ANZ, said that the won and the ringgit were among the best-performing Asian currencies this year, and that investors were now paring back on these currencies given the prospect of interest rates in the US rising sooner than expected. "Bouts of US dollar strength tend to peter out after a while," Goh said, adding it was hard to determine whether this was the start of a long term trend. "For now it's a shift in positioning that's causing the loss in Asian currencies," he said.