Emerging Asian currencies rallied on Thursday as the Federal Reserve signalled that the US central bank may raise interest rates more slowly than markets had expected, helping the region maintain the attractiveness of higher yields in the short term. The Taiwan dollar hit a two-week high on capital inflows. South Korea's won and Malaysia's ringgit jumped more than 1 percent as investors cut bullish bets on the US dollar to limit losses.
The Fed officials lowered forecasts for 2015 economic growth because of a weak start to the year and reduced its federal funds rate forecast. After that, US Treasury yields slipped and the dollar hit a one-month low against a basket of six major currencies. "They were dovish because the projections for rate hikes have been revised lower. It does lead to weaker USD vs. Asia in a short term," said Sean Yokota, head of Asia strategy for Scandinavian bank SEB in Singapore, referring to the Fed policymakers.
Still, Yokota and other analysts doubted sustainability of strength in emerging Asian currencies for a longer term as the Fed is still likely hike borrowing costs later this year. The US central bank said on Wednesday the US economy was probably strong enough to support an interest rate increase by the end of the year. Concerns of a debt default by Greece may also hurt risk appetite as Athens remains mired in conflict with creditors over a proposed cash for reforms deal.
"Asian FX will not strengthen much, and it will be short-lived. My strategy is to build more long USD vs. Asia on these dips," Yokota said, adding he still expects the Fed to raise interest rates in September. The Taiwan dollar jumped 1.4 percent to 30.802 per US dollar, its strongest since June 4. The island's currency found support from demand of foreign financial institutions, while local banks scrambled for the unit to cover short positions ahead of a local holiday on Friday.
Still, foreign investors' continuous stock selling limited its upside. Foreigners have been net sellers every day so far this month in the main Taiwan stock market, dumping a combined net T$88.9 billion ($2.9 billion) during the first 17 days of June, according to the Taiwan Stock Exchange data. The won advanced on stop-loss dollar selling by offshore funds and local traders. The South Korean currency extended appreciation, tracking gains in the yen.
Caution grew over possible intervention by the foreign exchange authorities to curb the won's outperformance against the Japanese currency. South Korea's companies compete against Japan's rivals in overseas markets for various products such as cars. The won's strength against the yen is seen biting into competitiveness of South Korea's products. The ringgit rose 1.1 percent to 3.7170 per dollar, its strongest since June 8. Most government bond prices gained with the 10-year yield hitting 4.033 percent, the lowest since June 4.