Wednesday, October 29, 2008

Asian currencies fast losing against US dollar

PETALING JAYA: Asian currencies, except Japan’s yen, have seen continued selldown, losing rapidly against the US dollar, as export-dependent Asia is perceived to be more vulnerable in a global recession, economists said.

RAM Holdings Bhd group chief economist Dr Yeah Kim Leng said the rise of the greenback was because it was seen as a safe haven compared with other Asian currencies.

And coupled with factors such as de-leveraging and a pull-back by institutional funds, the demand for the US dollar spiked, he said.

Nevertheless, Yeah observed that the current currency movements were against the norm.

The appreciation of the US dollar against the ringgit, for example, was “contrary to market behaviour” as the widening interest rate gap between the two countries should have provided support for the ringgit, he told StarBiz.

The present currency values were “a paradox of the global financial volatility,” Yeah said, adding that regional currency rates were expected to reverse in favour of the region’s currencies in the mid- to long-term when the volatility ends.

He warned that the “undue volatility of Asian currencies” would have a major impact on the real economy as it would destabilise trade and investment flows.

“The weak currency condition is worsened by the plunge in equity and commodity markets as they dampened the growth prospects of emerging economies,” he said.

Asian countries would have to step up fiscal stimulus measures to mitigate the possibility of a sharp export slowdown as demand from Western countries fell, Yeah advised.

UOB Singapore economist Ho Woei Chen agreed that investors were placing higher risk premiums on Asian economies, citing Singapore as a possible candidate to fall into a recession next year.

The Indonesian economy was also seen as vulnerable, with the rupiah plunging more than 10% during intra-day trade yesterday before settling at 3% lower, she noted.

Singular Asset Management Sdn Bhd managing director Teoh Kok Lin pointed out that the US dollar itself was “a carry trade currency”, given that many investors had borrowed in US dollars on expectation of weaker dollar in the next five years.

“As markets fall and investors sell off their assets, the need to repay US dollar loans also raises the demand for the currency,” he pointed out.

Meanwhile, the yen has bucked the trend of its regional peers mainly due to unwinding of carry trades as investors cut risky positions in high-yielding currencies.

CIMB Research chief economist Lee Heng Guie said the stronger yen was not a reflection of the prevailing weak economic fundamentals in Japan and if the rapid rise were left unchecked, it could worsen the already sluggish Japanese economy.

“A coordinated intervention by major global central banks to stem the excessive yen volatility is warranted,” he said.

Yesterday, the yen weakened against the greenback in anticipation of intervention by the Japanese central bank.

Aseambankers head of retail research Lee Cheng Hooi said the large trading band of 92 to 96 yen yesterday against the greenback was an indication of the unwinding in carry trades.

But with the Dow Jones futures and European markets “trying to rebound” ahead of the two-day Federal Open Market Committee meeting that began yesterday, the present volatility could diminish soon, he reckoned.

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