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Asian currencies rise as China says dollar may fall

Section: Daily Dispatches

Asian Currencies Advance
After China Says
Dollar May Decline

By Jake Lee and Yumi Teso
Bloomberg News Service
Thursday, December 7, 2006

Asian currencies advanced after China's central bank published an October report predicting the U.S. dollar may weaken and fund managers will sell dollar- denominated assets.

The People's Bank of China, holder of the world's largest foreign currency reserves, made the comments in an online version of its 2006 financial stability report, first released Oct. 8. A report summary on the bank's Web site that month didn't include the dollar outlook. The South Korean won rose to its strongest in nine years and the Japanese yen gained.

The dollar fell 3.9 percent against the euro in November, this year's biggest monthly decline, as investors raised bets the Federal Reserve will cut interest rates as growth slows. China's central bank plans to invest more of its $1 trillion in currency reserves in emerging markets and assets with higher returns, Governor Zhou Xiaochuan said last month.

"Everyone's looking for excuses to get out of the dollar and bet on more Asian currency strength, and this provides it," said Claudio Piron, head of Asian currency research at JPMorgan Chase Bank in Singapore.

The won gained 0.3 percent to 913.80 against the dollar as of 3 p.m. local time, the close of onshore trading, according to Seoul Money Brokerage Services Ltd. It reversed an earlier loss of as much as 0.5 percent. Thirteen of the 15 most actively traded Asia-Pacific currencies appreciated.

"As the cycle of U.S. interest rate increases is soon to be over, and other major economies step into that cycle, the U.S. dollar may soften," the October report said.

A central bank spokesman, who declined to be identified, wouldn't comment on whether the central bank's views have changed since October.

The yen traded at 114.85 to the dollar as of 8:30 a.m. in London from 115.26 late in New York yesterday. Japan's currency gained 2.5 percent against the dollar in the past month.

"The comment came out when sentiment for the dollar is so weak and encouraged people to dump it," said Tetsuo Yoshikoshi, a market analyst at the treasury unit of Sumitomo Mitsui Banking Corp. in Singapore. "People have been concerned about the dollar's further weakness and any comment about that, old or new, would of course put downward pressure on the dollar and push up Asian currencies."

People's Bank of China Vice Governor Wu Xiaoling said in an article on Nov. 24 that East Asian nations need to reduce their reliance on dollar inflows, which have caused their reserves to be vulnerable to a drop in the U.S. currency.

Malaysia's ringgit, Asia-Pacific's best performer over the last month, also gained after Second Finance Minister Nor Mohamed Yakcop said its advance isn't hurting the nation's exports.

The strength of the ringgit is "market-driven," Nor said, adding that it may attract more investors to Malaysian stocks, which climbed to a nine-year high yesterday. The currency has surged 6.7 percent this year.

"While other Asian currencies have been rising against the dollar, the authorities will also let the ringgit strengthen," said Osamu Takashima, chief analyst of the global markets sales and trading division in Tokyo at Bank of Tokyo-Mitsubishi UFJ Ltd. "There is more room for the ringgit to rise, probably at a bit slower pace from here."

The ringgit yesterday touched the highest since the currency's link to the dollar ended in July last year. It advanced for a seventh day, gaining 0.2 percent to 3.5415.

Thailand's central bank said the baht, close to the highest since 1998, may strengthen further. The Thai baht rose 0.3 percent to 35.58 per dollar.

"Currency inflows are continuing to buoy the baht but the pace of gains is slower," Bank of Thailand Governor Tarisa Watanagase said. "Competitiveness hasn't declined as the baht's strength is close to that of other regional currencies over a two-year period."

The Indonesian rupiah rose 0.1 percent to 9,100 per dollar. The currency held gains after the central bank cut the rate used as a reference for bill sales by half a percentage point to 9.75 percent, a 14-month low, as expected by 16 of 21 economists surveyed by Bloomberg News. That was the seventh reduction since May.

Elsewhere in Asia, the Singapore dollar strengthened 0.1 percent to S$1.5381, according to data compiled by Bloomberg. The Philippine peso gained 0.1 percent to 49.45.

The Taiwan dollar was little changed at NT$32.30 from NT$32.297 yesterday, according to Taipei Forex Inc.

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