Asian currencies edged up on Tuesday, with the dollar in a more defensive stance, but analysts said regional currencies' short-term fate could be decided by the annual central banking conference in Jackson Hole this week. The dollar index inched up after falling as much as half a percent the previous day, easing further off three-week highs struck last Wednesday. The greenback has come under pressure from North Korea tensions and also tepid US inflation figures that have cast doubt on further monetary tightening.
"Asian currency movements will depend on what Federal Reserve Chair Janet Yellen and European Central Bank President Mario Draghi will speak in the meeting," said Qi Gao, Asia FX Strategist at Scotiabank. He added that if they mention more about balance-sheet widening and exiting monetary stimulus, then we could see emerging Asian currencies decline.
"But if they sound a bit dovish, we will see a modest risk- on sentiment after the meeting." Sim Moh Siong, FX strategist at Bank of Singapore, said while there is no expectation of a new policy message from Draghi, the same cannot be said for Yellen. "There is a mixed view right now whether Yellen would send a message in line with FOMC minutes, or send a message in line with what Dudley has said, which is more hawkish in nature," he said.
"If we see a message from Yellen that despite low inflation in the U.S, the Fed is still set on tightening path, it could provide some support for the dollar against the Asian currencies." On Tuesday, the South Korean won was up more than a quarter of a percent, tracking strong gains in the domestic equities market.
The Philippine peso edged up after 10 successive sessions of declines. On Monday, the central bank warned traders that it would intervene in the currency market to curb speculation, adding that it expects the peso to stabilise following its sharp slide. China's yuan firmed after the central bank set the midpoint at its firmest in 11 months.
Indonesia's rupiah too edged higher ahead of the central bank's policy meeting later on Tuesday. A Reuters poll has forecast the policy rate will likely remain unchanged despite weak consumption. Except for the peso, all other Asian currencies have risen this year. The Thai baht and Japanese yen have posted more than seven percent gains against the dollar, while the Singapore dollar, South Korean won and Taiwan dollar have all firmed more than six percent.
However, some analysts said regional currencies' gains in the coming months will be limited. "My thinking is that, the best days for Asian currencies are probably behind us," said Bank of Singapore's Siong. "Going forward I expect moderate weakness in Asian currencies against the dollar, mainly because there is a possibility of a mini dollar rally".
The Thai baht inched up against the dollar following strong GDP data on Monday. Thailand's economy grew 3.7 percent on year in the second quarter, the fastest clip in over four years. "Stronger-than-expected GDP growth will be supportive for the Thai baht," said Scotiabank's Gao.
"Meanwhile an excessively strong Thai baht is not in the local regulator's interest." Thailand's central bank said on Monday it had observed occasional increases in the volume of foreign exchange transactions and might consider extra measures to limit speculation in the baht.