Asian currencies rose against the dollar Friday, prompting a number of regional central banks to intervene, as the U.S. currency fell over that nation’s budget woes and a rise in the euro spurred the region’s currencies higher.

The move follows Thursday’s rate increase by the European Central Bank, its first tightening since 2008. While the move was widely expected, it suggests world economic growth will continue to improve.
That has investors looking to Asian currencies, which are perceived as higher-risk, higher-return investments. Many Asian currencies take their cue from the euro, which has acted as a barometer of global risk appetite.
Meanwhile, the U.S. dollar fell against most major and regional currencies as hopes faded that Republicans and Democrats in Washington could agree on a budget deal before the U.S. government runs out of operating cash at midnight Friday.
Among the sharp Asian gainers, the Singapore dollar broke from its recent stagnancy to pop to a record high against the U.S. currency, the Australian dollar again notched its highest level since being floated in 1983 and the South Korean won hit a two-and-a-half-year high.
Central banks in the Philippines, Malaysia, South Korea, Indonesia, Thailand and India apparently bought dollars to keep the advance in their own currencies under control, local traders said.
A stronger currency makes a nation’s exports less competitive in overseas markets. While Asian central banks can’t stop the broader trend of a weak dollar, they can try to keep their export-reliant economies roughly competitive with their neighbors’. The authorities seldom comment on intervention, but officials at several central banks in recent days have said they will act to prevent excessive volatility.
The region’s currencies have surged over the past year as Asia has led the global economic recovery and as low interest rates in the richest countries have spurred a flood of investor capital into Asia seeking higher returns.
Asian currencies also got a boost as the People’s Bank of China fixed the tightly controlled yuan higher Friday for a sixth session, setting the dollar’s central parity rate at 6.5420 yuan.
Expectations that Beijing will allow faster yuan gains sent the yuan sharply higher in the market for nondeliverable forwards, an offshore venue where investors can bet on future moves. The 12-month dollar/yuan contract sank to a three-year low bid quote of 6.3620 yuan from 6.4 yuan.
The region’s currency authorities are generally tolerating greater appreciation these days because it helps them deal with the regional threat of rising inflation, said Thomas Harr, head of Asia currency strategy at Standard Chartered Bank in Singapore. He said the dollar will likely remain weak until at least June, when the Federal Reserve is slated to end what’s known as quantitative easing, or the policy of buying government bonds.
Friday’s euro rise kick-started the Asia rally. The common currency had come off Thursday’s highs as the ECB’s quarter-percentage-point rate increase was almost universally expected and central bank chief Jean-Claude Trichet said the ECB hadn’t decided to embark on a series of rate increases.
Nonetheless, the euro took off in the Asia morning on the view that the ECB may tighten every quarter.
The euro’s rise to a 2011 high above $1.44 spurred accelerating gains among Asian currencies, notably the Singapore dollar. The U.S. dollar had been largely holding above support around S$1.26 for the past two weeks, but the euro’s climb helped break through that level. In afternoon Asian trading, the euro was at $1.4399, and the U.S. currency bought S$1.2571.
“Whoever is long dollar will be suffering here,” said currency strategist Nizam Idris at UBS in Singapore.
The ICE Dollar Index, a broad measure of the currency’s value against the currencies of America’s main trading partners, was at 75.185 late in the Asian session. That was down from 75.534 late in New York and threatened a slide to its November 2009 low of 74.17 in coming weeks.
To tame the peso at five-month highs, the Philippine central bank apparently bought $600 million between 43.05 pesos and 43 pesos in heavy trade, defending the U.S. currency around the psychologically important 43-peso line, Manila traders said. Bank Negara Malaysia apparently twice sold the ringgit, which has benefited as a proxy for the rising Chinese currency, Kuala Lumpur traders said. They spotted the central bank buying dollars at 3.0210 ringgit late in the day after a defense at 3.0220 ringgit failed.
The Bank of Korea apparently bought an estimated $1 billion as the dollar fell to 1,082 South Korean won, its lowest since August 2008, when the global financial crisis was escalating, Seoul dealers said.
In a bid to curb the rising rupiah and baht, Bank Indonesia apparently bought an estimated $100 million at 8,653 rupiah, while the Bank of Thailand apparently bought dollars around 30.03 baht, local dealers said. After the rupee hit a six-month high, the Reserve Bank of India was seen apparently buying dollars at 43.98 rupees, local traders said.
(Source: WSJ)