Asian currencies fell versus the dollar on Friday, hit by a rise in US and European bond yields after the European Central Bank prolonged its bond buying scheme but said it would trim back the size of its monthly purchases from April. The South Korean won led the broad losses among emerging Asian currencies ahead of a parliamentary vote to impeach President Park Geun-hye due on Friday.
In the equity market, however, overseas investors were slight net buyers of South Korean shares to the tune of 14.9 billion won ($12.79 million) as of 0555 GMT, a possible sign that higher US bond yields and broad dollar strength were the main drivers behind the slip in the won. The US 10-year Treasury yield last stood at about 2.43 percent, edging back towards a recent 1-1/2 year peak of 2.492 percent. Euro zone bond yields rose on Thursday after the ECB's policy announcement.
Such rises in US bond yields can reduce the relative attractiveness of higher-yielding emerging market currencies and assets. Market sentiment toward emerging Asian currencies is likely to turn cautious ahead of the US Federal Reserve's interest rate decision next week, said Kota Hirayama, senior emerging markets economist for SMBC Nikko Securities in Tokyo.
While the Fed is widely expected to raise interest rates next week, investors will be wary of the risk that it may sound more hawkish on the policy outlook, Hirayama said. "The market's concern is that there could be some type of wording that suggests that the pace of interest rate hikes could be accelerated somewhat," Hirayama said.
"It will become hard to actively buy emerging markets including Asia," he said, referring to the near-term outlook. The Fed's policy decision is due on December 14 after a two-day policy meeting and will be accompanied by a news conference by Fed Chair Janet Yellen.
Sentiment towards emerging Asian currencies became less bearish in the last two weeks, according to a Reuters poll this week, as the dollar pulled back from a sharp rally that followed Republican Donald Trump's surprise win in last month's US election.
The won slipped around 0.6 percent against the dollar, leading losses among emerging Asian currencies. The won fell ahead of an impeachment vote in parliament on Friday against President Park Geun-hye. Parliament is expected to vote in favour of impeachment, with support from some members of Park's party, according to opposition parties.
Qi Gao, FX strategist for Scotiabank, said that if parliament were to vote against impeachment, that may trigger further selling of the won. Such an outcome could lead to South Korea "continuing to spend resources on political issues rather than shoring up the economy," he said. Wu Mingze, FX trader of global payments for financial services provider INTL FCStone in Singapore, said the focus for the won was more on factors such as next week's Fed meeting and the implications of US President-elect Trump's policies. "The general feel is that South Korea will sort this political mess out rather quickly and move on," Wu said. "There will certainly be negative impact if the uncertainty remains longer than it should," he added.