Asian Central Banks Defend Currencies As Plunge Continues

Southeast Asian central banks defended their currencies Thursday against waves of selling as investors continued to flee risky assets on deepening credit worries.

The authorities in Indonesia, Singapore, the Philippines and Malaysia sold hundreds of millions of dollars altogether in market interventions to sustain their local currencies, traders said, in the face of the selloff of emerging-market assets in the ongoing fallout to the crisis in U.S. subprime mortgages. Other central banks, such as that in Taiwan, were suspected of quietly entering the market to smooth out currency volatility. Some even wondered if Reserve Bank of Australia might be in the market. While a far cry from the panic of a decade ago, when Asian governments were in danger of depleting their foreign reserves as they defended their currencies from a massive capital flight, the current interventions still mark a stark turnaround. Only recently, many Asian central banks were selling their currencies to keep their export-reliant economies competitive with powerhouses like China.

Risk Aversion Escalates

The reversal highlights the way that the global spike in risk aversion can hit even those markets with strong economic fundamentals and growth prospects and little exposure to high-risk U.S. home loans. Indeed, the central banks didn't appear to be trying to reverse the tide of selling - only to brake the decline in their currencies and prevent plunges from turning into a panic. "We have been in the market and will continue to be in the market" to slow the rupiah's rise, said Bank Indonesia Governor Burhanuddin Abdullah, even as he said the currency's level, around IDR9,460 to the dollar, was "OK." Currency dealers suspect the bank sold more than $400 million Thursday through state banks as foreign investors exited Indonesian markets - Jakarta shares plunged 7.7% for the day. The central bank sold dollars around IDR9,480 to keep the U.S. currency from rising above the psychological IDR9,500 line, traders said. Abdullah wouldn't discuss the size or levels of the intervention. The Monetary Authority of Singapore apparently bought some S$200 million Thursday morning, selling the U.S. currency from S$1.5320 to about S$1.5400, one local trader said. Another said it appeared to be the central bank's second day in the market. The suspected sales of the Singapore dollar are noteworthy as the MAS officially targets a moderate rise in the local currency. The central bank uses the exchange rate, rather than interest rates, as a policy instrument because the city-state's huge trade flows dwarf the island's domestic economy. Late in the Asian day, the U.S. currency fetched Malaysia's central bank strongly defended the ringgit through agent banks during the day, selling the dollar at MYR3.4960 and MYR3.4980 to keep it below MYR3.5000 - and then selling at MYR3.5080 when the U.S. currency popped to a five-month high, said traders in Kuala Lumpur. Finally, though, it wasn't Bank Negara Malaysia that halted the dollar's rise - it was trader fatigue. "The market is just tired of pushing higher now," said a trader, as the dollar eased a bit late in the day to end at MYR3.5030. Traders said the next level to watch is MYR3.5200, near the March high. The Philippine peso fell to a two-month low despite apparent heavy intervention by the central bank. The authorities sold $200-$300 million - one-third to one-half of the day's trading volume, Manila traders said. The bank was thought to be fighting the greenback's rise at PHP46.50, PHP46.60 and then at PHP46.70. "Without the central bank there, it could have easily gone up to target the 47.00 level," said one trader. Bangko Sentral ng Pilipinas Deputy Gov. Diwa Guinigundo declined to comment. Taiwan's central bank also bought the New Taiwan Dollar in a now-familiar pattern, but not aggressively, Taipei traders said. The authorities were just attempting to smooth out currency moves and prevent too heavy an outflow from the island as the local stock market sank 4.1%. The U.S. dollar rose to NT$33.155 from Wednesday's close of NT$33.010. Traders are looking to see if the central bank can cap the greenback's rise at NT$33.200 for now.

Besides The Emerging Markets

Outside of emerging markets, the Australian central bank might have been trying to support the local dollar during the day's "disorderly" plunge, said Commonwealth Bank currency strategist Richard Grace. That view wasn't widespread and, late in the day, the Aussie dollar, which traded above 84 U.S. cents only Tuesday, plunged below 80 U.S. cents for the first time since mid-March. Taking quite the opposite approach across the Tasman Sea, New Zealand Finance Minister Michael Cullen continued to talk the Kiwi dollar down, even though it's off by more than 12% from last month's 25-year high above 81 U.S. cents. "Despite the fall over the last week, the (New Zealand) dollar is still well above a position justified by medium-term fundamentals and has been for a long time - much longer than in previous economic cycles," Cullen said in a speech. The Reserve Bank of New Zealand intervened for the first time in June, selling the local dollar as policymakers said the overly strong Kiwi was hurting the country's exporters. Cullen was signaling that around 71 U.S. cents, the New Zealand dollar could fall some more. Similarly in South Korea, the authorities watched as the won skidded to a six-month low while stocks plummeted 9%. "The central bank is perhaps content and welcoming the falling won of late because not so long ago, they were actually concerned about the negative impact of the strong won on Korean exporters, especially those competing with Japanese rivals," said a trader at a foreign bank in Seoul.