Rate hike fears shake up Asian currencies

Mr Julian Wee of the National Australia Bank points out that while the Singdollar is a resilient currency, a US rate hike would leave it vulnerable to a decreased appetite for Asian financial assets.
Mr Julian Wee of the National Australia Bank points out that while the Singdollar is a resilient currency, a US rate hike would leave it vulnerable to a decreased appetite for Asian financial assets.PHOTO: GETTY IMAGES/ ISTOCKPHOTO

Expectations of Fed move could see US dollar gaining against regional currencies: Analysts

Most Asian currencies have been hit by jitters over an imminent interest rate hike in the United States as the Federal Reserve prepares for its policy-setting meeting this week.

The Singapore dollar has stayed relatively stable, gaining about 0.4 per cent against a strengthening greenback last week amid the uncertainty. It was trading at $1.3643 to the US dollar as at 8pm on Friday, slightly weaker than Thursday's close of $1.3634.

The Malaysian ringgit was dealt a more severe blow, weakening to RM4.1305 per US dollar - its weakest level in around three months - as oil prices tumbled amid the continuing supply glut. It was up 0.07 per cent at RM3.0301 to the Singdollar on Friday, but down 0.8 per cent for the week.

"The market appears to be focusing on the increasing certainty of a US rate hike some time this year, even if it's not in September," National Australia Bank (NAB) senior markets strategist Julian Wee told The Straits Times.

"An earlier rate hike will mean a stronger US dollar, which could hurt Asian currencies, especially those that are still likely to see rate cuts."

He added: "Beyond that, we see the US dollar gaining against Asian currencies as the markets increasingly price in a rate hike at the December Fed meeting."

Fears that central banks worldwide may no longer be able to support economies only added to the sell-off in Asian currencies.

Mr Sim Moh Siong, senior currency strategist at Bank of Singapore, said in a note: "The US dollar's gains were most pronounced against emerging market and commodity exporter currencies, as concerns about the European Central Bank and the Bank of Japan backing away from quantitative easing programmes triggered higher long-end yields and hurt carry trades."

Expectations of a rate hike emerging from the Federal Open Market Committee meeting this week have eased somewhat amid dovish comments from Fed officials.

But should the Fed indeed decide to hike rates, the US dollar will "soar across major currency pairs, as such a move will be largely divergent from the accommodative monetary policy that we see almost everywhere else in the world," said Phillip Futures investment analyst Woon Tian Yong.

He noted that strong job and retail sales data will increase the chance of a US interest rate hike, adding further appreciative pressures to the US dollar.

NAB's Mr Wee noted that while the Singdollar was among the more resilient currencies compared with its peers, it "remains vulnerable to a reversal in risk appetite - specifically, appetite for Asian financial assets".

He expects the Monetary Authority of Singapore to leave its policy stance unchanged at its October meeting, with the Singdollar likely trading at around $1.38 to the US dollar at the end of the year.

A version of this article appeared in the print edition of The Straits Times on September 19, 2016, with the headline 'Rate hike fears shake up Asian currencies'. Print Edition | Subscribe