The central banks of South Korea, Singapore, Thailand and Indonesia were suspected of intervening in foreign exchange markets Wednesday to contain gains in their currencies, but analysts say the continued weakness of the U.S. dollar means Asian units should extend their rallies.
The wave of intervention, which has continued across the region for most of this year, hasn't been strong enough to reverse the strengthening trend in Asian currencies, as many policymakers are allowing their currencies to rise slowly to limit imported inflation.
That stance was reinforced after China, the top trading partner for key Asian countries, said in June it would let the yuan strengthen against the dollar—meaning that other Asian countries can maintain their export competitiveness against China even if their currencies rise a bit.
On Wednesday the Thai baht and the Malaysian ringgit hit their highest levels since the 1997 Asian currency crisis, while the Singapore dollar rose to an all-time high.
In a note to investors, Standard Chartered analysts said global dollar weakness, closely tied to market expectations that the U.S. Federal Reserve may launch another round of quantitative easing by boosting purchases of U.S. securities, is likely to keep Asian and other emerging market currencies in strong demand. In recent days, the central banks of countries ranging from Russia to Colombia have been suspected of intervening in forex markets because of dollar weakness.
"The prospect of another round of quantitative easing by the Fed in the fourth quarter of 2010 should be seen as broadly negative for the dollar," Standard Chartered wrote.
Intervention Wednesday was particularly significant in Indonesia, which has attracted a surge of inflows thanks to its solid economic performance and high interest rates.
Jakarta-based traders said the central bank was suspected of buying around $50 million at 8,950 rupiah in early trade, and then an unspecified amount at 8,945 rupiah. Neither move managed to send the rupiah lower, however, and the dollar last traded at 8,935 rupiah.
"The dollar is still under pressure against the rupiah, as investors' appetite for riskier assets is improving," one dealer in Singapore said.
Intervention by Bank Indonesia has continued for the past two years, but is now likely at its highest volume ever. Bank Indonesia's forex reserves rose 9% in the first three weeks of September, a huge amount even by East Asian standards, mostly due to dollar-buying in forex markets.
The Bank of Thailand and Monetary Authority of Singapore also were suspected of early intervention moves Wednesday. In Bangkok, traders said the BOT was spotted intervening at 30.50 baht against the dollar, but the baht rose further and last traded at 30.46 baht.
In Singapore, the MAS managed to weaken the local dollar slightly after it soared to an all-time high at 1.3152 Singapore dollars against the greenback. The Singapore dollar last traded at S$1.3170.
Seoul traders said intervention by the Bank of Korea was relatively mild, as the Korean won is still some distance away from two-year highs hit earlier this year. The dollar last traded at 1,141 won, having fallen as low as 1,139 won earlier in the day.