Asian Currencies Gain as Interest Rate Outlook May Attract Funds to Region

Asian currencies gained this week, led by South Korea’s won, on speculation investors will pour more funds into the region as interest rates are raised to stem gains in consumer prices.

The yuan had its biggest weekly advance in a month on speculation China’s inflation fight will lead to faster appreciation sought by major trading partners including the U.S., Brazil and India. Finance chiefs from the Group of 20 nations will today meet for a second day in Paris to discuss imbalances that pose a risk to the global economy. The Philippine peso had its best week in five months after a central bank report showed citizens living overseas sent record funds home last year.

“Inflation pressure is forcing Asian central banks to tighten monetary policy,” said Ho Woei Chen, an economist at United Overseas Bank Ltd. in Singapore. “Higher interest rates are driving inflows and Asian currencies higher. The yuan is another factor ahead of the G-20 meeting.”

The won strengthened 1.5 percent this week to 1,112.10 per dollar in Seoul, according to data compiled by Bloomberg. The peso rose 1.4 percent to 43.33, Indonesia’s rupiah climbed 1 percent to 8,860 and India’s rupee appreciated 1.1 percent to 45.21. The Singapore dollar advanced 0.8 percent to S$1.2748.

China, India, Indonesia, South Korea and Thailand have all boosted borrowing costs this year, widening the gap with the Federal Reserve’s near-zero benchmark rate, as Asia leads a global economic recovery. Developing economies in the region will expand 8.4 percent this year and next, double the average 4.2 percent pace of Latin America and more than triple the 2.5 percent annual growth in industrialized nations, the International Monetary Fund estimated last month.
Stronger Yuan

China’s central bank raised its reference rate for the yuan to 6.5781 per dollar yesterday, the strongest level since a dollar peg ended in July 2005. The currency, which is allowed to trade up to 0.5 percent on either side of the daily fixing, yesterday touched 6.5721, the highest since official and market exchange rates were unified at the end of 1993.

Data this week showed inflation accelerated to 4.9 percent in January from 4.6 percent the previous month, exceeding the government’s goal of keeping the rate within 4 percent this year. U.S. Treasury Secretary Timothy F. Geithner reiterated on Feb. 11 that China needs to allow the yuan to strengthen to manage inflation, a week after refraining from labeling the nation a currency manipulator in a report to Congress.

Korea Rates

The won had its biggest weekly gain this year on speculation the central bank will boost interest rates next month to curb inflation. The Bank of Korea unexpectedly kept its benchmark rate at 2.75 percent at a policy meeting this month, even after inflation breached the central bank’s 4 percent ceiling to reach 4.1 percent in January. It raised borrowing costs in January for the third time since June and the next monthly review is scheduled for March 10.

“Inflation is a hot topic and one of the reasons for the won gains is that Bank of Korea may raise rates next month as they didn’t do it in February,” said Ko Yun Jin, a currency trader at Kookmin Bank in Seoul.

Finance Minister Yoon Jeung Hyun said on Feb. 9 that the government needs to act “preemptively” to curb inflation as price gains can weaken the foundation of a stable economy.

The peso hit a three-month high of 43.27 per dollar yesterday. Remittances increased 8.1 percent from a year earlier to $1.69 billion in December and totaled $18.8 billion in 2010, the central bank said Feb. 15.

Elsewhere, Thailand’s baht advanced 0.9 percent this week to 30.59 against its U.S. counterpart and Malaysia’s ringgit advanced 0.8 percent to 3.034, according to data compiled by Bloomberg. Taiwan’s dollar fell 0.6 percent to NT$29.408.