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Asian central banks intervene to slow dollar's fall

Section: Daily Dispatches

Dollar Plunge Sends Asian Currencies Surging;
Some Central Banks Intervene in Market

By Arran Scott
Dow Jones Newswires
via Associated Press
and International Herald-Tribune, Paris

SINGAPORE -- Several Asian currencies surged to multiyear highs Wednesday, prompting some central banks to intervene to curb a broad U.S. dollar selloff, but Asia's growing inflation problem means authorities are not likely to try too hard to fight the trend.

Inspired by the U.S. dollar's drop to a new record low against the euro, investors bid up the Philippine peso, Malaysian ringgit, New Taiwan dollar, and others, adding fresh momentum to a long-running upward move in Asian currencies.

The U.S. dollar sank to an eight-year low against the peso, a decade low against the ringgit, and a 33-month low against the New Taiwan dollar, which has led the rally in Asian currencies so far this year. China's yuan also continued to grind higher.

Central banks in the Philippines, Malaysia, and Taiwan entered the foreign exchange market to slow the sudden move upward in their currencies, traders said. Traders were on guard for similar moves in Singapore and Thailand, where the authorities are said to have been quietly placing bids for dollars in recent sessions.

The latest surge in Asian currencies draws strength from two sources: widespread U.S. dollar weakness and a general policy consensus in Asia to fight rising inflation with stronger currencies.

The euro's rise above the psychologically key US$1.500 level in Asian morning trading catalyzed bearish sentiment toward the dollar, which has suffered from worries about the U.S. economic outlook and rate cuts by the Federal Reserve, which is eager to keep the economy growing, even, investors fear, at the expense of higher inflation in the U.S.

On the other side of the equation, Asian central banks have been showing a growing willingness to let their currencies rise to tame inflation. Many have long intervened to slow the pace of appreciation of their currencies, which have been driven higher by wide trade surpluses and foreign fund inflows betting on a bright Asian economic outlook. But they have been doing so much less aggressively in recent months as inflation has picked up.

Singapore, which uses its foreign exchange rate as its main policy lever, is a flagship case: Consumer price inflation ran at 6.6 percent in January, the fastest pace in 25 years, and the Monetary Authority of Singapore has been quietly guiding the country's currency higher.

In the Philippines, consumer prices surged 4.9 percent in January, the biggest rise in more than a year, reflecting inflationary pressure from soaring commodities prices.

At 0750GMT, the dollar was trading at 40.30 Philippine pesos, 3.2020 Malaysian ringgit, 30.935 Taiwan dollars and 1.3982 Singapore dollars.

Traders said it's likely Asian currencies will climb higher.

"What we're seeing is an opportunistic move: because the dollar is weakening, people are buying" Asian currencies, said Callum Henderson, head of currency strategy at Standard Chartered Bank. "As for the pace of intervention, it's aimed at slowing the move rather than trying to cause a rebound."

Henderson said that while the focus of Asian central banks is now on fighting inflation, it could shift to worries about growth if demand overseas weakens, hurting Asia's export-dependent economies. That could set Asian currencies up for a correction in the second or third quarter, he said.

Growth in China, the powerhouse of the Asian export machine, appears to be set to slow slightly this year, but most analysts said it will continue to grow strongly. That will help underpin demand in Asian economies, possibly keeping inflation on the boil. It also means China will likely continue to let its currency appreciate, setting a drumbeat for the regional currency market.


Arran Scott is a correspondent for Dow Jones Newswires in Singapore.

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