Asian currencies languished on Tuesday as tensions flared up amid an escalating war of words between North Korea and the United States, driving investors to safe haven assets. North Korea's foreign minister Ri Yong Ho said on Monday that President Donald Trump had declared war on the country and that Pyongyang reserved the right to take countermeasures, including shooting down US bombers even if they are not in its air space.
The Japanese yen was up 0.1 percent against the dollar, while most other regional currencies tumbled on the day. "There has been a risk-off situation. As a result we see EM currencies being sold off and that carried over into the Asian currencies space," said Sim Moh Siong, FX strategist at Bank of Singapore.
Over the last two weeks, the dollar advanced against emerging Asian currencies bolstered by odds of another interest rate hike this year and analysts said a new tax plan to be unveiled on Wednesday could further prop up the greenback. US President Donald Trump and his team of Republican tax policymakers are expected to call for a corporate income tax target rate possibly within a range of 18-23 percent, down from the current rate of 35 percent.
The South Korean won was the biggest loser among regional currencies and the soaring risk sentiment was also evident on its credit default swap prices, as South Korea's sovereign CDS spread widened to a 19-month high. The Indonesian rupiah dipped to a one-month low on the back of month-end corporate demand for the dollar, however the local currency was supported by a rally in bond prices.
The Indian rupee too followed suit, tumbling to a six-month low on corporate dollar purchases and weak equities. The local benchmark index fell more than half a percent. The Philippine peso was down 0.16 percent against the dollar on the day. The peso is the only Asian currency that has declined against the dollar so far this year.
On Tuesday, central bank Governor Nestor Espenilla said a decline in the Philippine peso was in line with economic fundamentals and woul support growth by encouraging more investment in infrastructure. Most analysts said the country's deteriorating current account balance was the reason for the peso's decline. For the first time in 15 years, the Philippines is expecting its 2017 current account balance to be in a deficit of $600 million.