Sep 29, 2014

    Investors spurn Asia currencies for US$

    CURRENCIES across the region have dipped to their lowest levels in months, as investors flock to the surging greenback.

    The dollar is benefiting from expectations that the United States Federal Reserve is closer to raising interest rates.

    Analysts said that Asian currencies have further to fall, although a repeat of the sell-off seen after last year's "taper tantrum" is unlikely.

    Former Fed chairman Ben Bernanke sent regional currencies tanking last May when he said it was thinking of scaling down huge asset purchases used to stimulate the US economy.

    The current weakness in Asian forex markets comes after months of strength.

    The ringgit hit a four-month low of 3.26 against the US dollar on Friday, while the Philippine peso is at its weakest since April.

    The Singapore dollar has slipped about 2 per cent against the greenback since July. The yen reached a six-year low of 109 to the dollar last week, down 4.6 per cent since the start of the month.

    The yen's sharp depreciation has been a major factor behind slides in other Asian currencies, said Tim Condon, the chief economist for Asia at ING Bank.

    The Fed has not raised rates yet - likewise in May last year, it had not actually started to reduce its asset purchases.

    But Mr Condon said just the thought that it is preparing to raise rates makes the US look more attractive to investors, as hikes by the European Central Bank or the Bank of Japan are a far more distant prospect.

    When the Fed contemplates raising rates, funds flow from developing economies to the US as investors rebalance their portfolios, said Phillip Futures investment analyst Howie Lee.

    Most at risk are currencies with high foreign debt ownership, such as the ringgit, and economies with consistent current account deficits, such as India and Indonesia.

    Mr Lee said the baht is expected to be more resilient as Thailand has "a solid current account surplus and a healthy level of foreign reserves".

    In his view, the market expects rates to be raised around July next year, and some Asian currencies could "weaken substantially" in the second quarter.