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 its major trading partners including the US, Brazil and India. Finance chiefs from the G20 were to meet yesterday 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 (大華銀行) in Singapore. “Higher interest rates are driving inflows and Asian currencies higher. The yuan is another factor ahead of the G20 meeting.”
The won strengthened 1.5 percent this week to 1,112.10 per US dollar in Seoul. 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 US 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 IMF estimated last month.
China’s central bank raised its reference rate for the yuan to 6.5781 per US dollar on Friday, 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, on Friday touched 6.5721, the highest since official and market exchange rates were unified at the end of 1993.
Data this week showed inflation in China accelerated to 4.9 percent last month from 4.6 percent the previous month, exceeding the government’s goal of keeping the rate within 4 percent this year. US Secretary of the Treasury Timothy 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 the US Congress.
The won had its biggest weekly gain this year on speculation the South Korean 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 last month. It raised borrowing costs last month for the third time since June last year.
“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.
The peso hit a three-month high of 43.27 per dollar yesterday. Remittances increased 8.1 percent from a year earlier to US$1.69 billion in December and totaled US$18.8 billion last year, the central bank said on Tuesday.
Elsewhere, Thailand’s baht advanced 0.9 percent this week to 30.59 against its US counterpart and Malaysia’s ringgit advanced 0.8 percent to 3.034.
Meanwhile, the New Taiwan dollar fell 0.6 percent to NT$29.408.
EURO GAINS
The euro rose to a one-week high against the US dollar after European Central Bank Executive Board member Lorenzo Bini Smaghi said the bank may need to raise interest rates as global inflation pressures mount.
The shared currency gained against most major counterparts and had its first weekly advance in almost a month.
“Bini Smaghi came out with very hawkish comments, which was the catalyst for the euro and we’ve seen the momentum continue throughout the day,” said John Doyle, a strategist in Washington at -currency-trading firm Tempus Consulting Inc. “The Swiss franc has been the beneficiary of the geopolitical risks in the Middle East.”
The euro rose 0.6 percent to US$1.3693 at 5pm on Friday in New York and touched US$1.3715, the highest level since Feb. 10. Earlier it dropped as low as US$1.3546. The common currency gained 1.1 percent for the week. It strengthened 0.5 percent to ¥113.90, from ¥113.37 on Thursday, and reached ¥113.92, the highest since Jan. 27.
The yen appreciated 0.2 percent to ¥83.18 per US dollar after yields on US two-year notes dropped as investors sought safety amid the Middle East turmoil. The lower yields made US dollar-denominated assets less attractive. Earlier, the yen fell as much as 0.3 percent versus the US currency.
“As the economy gradually recovers and global inflationary pressures arise, the degree of accommodation of monetary policy has to be monitored and, if needed, corrected,” Bini Smaghi said in an interview with the Bloomberg Brief: Economics newsletter.
Bini Smaghi, who made his remarks in an interview conducted by e-mail on Wednesday, said it’s “essential” to continue to anchor inflation expectations.
Sterling rose versus the US dollar amid speculation inflation may soon force the Bank of England to raise interest rates. The pound reached a two-week high against the dollar after data showed UK retail sales surged 1.9 percent last month.
The pound climbed as much as 0.6 percent to US$1.6263, the strongest intraday level since Feb. 3, before trading at US$1.6254, up 0.5 percent.
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