Ringgit, peso at multi-year highs

21-05-2007: Ringgit, peso at multi-year highs

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The ringgit and the Philippine peso hit multi-year highs on May 21 to lead Asian currencies higher after China widened the yuan's trading band against the dollar and lifted interest rates.

The yuan will now be permitted to rise or fall by 0.5% each day versus the dollar, rather than 0.3%. The central bank raised its one-year lending rate by 0.18 percentage point and its one-year deposit rate by 0.27 percentage point.

This is seen paving the way for faster appreciation of the yuan, dragging Asian currencies higher too. The ringgit and Singapore dollar, trading proxies for the yuan, are expected to benefit the most.

The ringgit strengthened to 3.3910 per dollar, its highest in just over nine years, making a decisive push through the 3.4 level that had proved a tough chart barrier for more than a week.

"It is primarily because of the Chinese rate move as well as the widening of the band," said a trader in Kuala Lumpur. "So the first reaction is to sell dollar/ringgit."

But he added that the move through 3.4 per dollar had also triggered profit taking, with the central bank likely to step in to the market and buy dollars in the 3.39 area.

The Philippine peso extended recent gains to 46.39 per dollar, its strongest level since early 2001, while the Indonesian rupiah rose almost half a percent to about 8,775 per dollar.

The South Korean won firmed to about 931 per dollar, up about 0.4% from May 18's six-week lows.

Alvin Cheng, a trader at Fortis Bank in Hong Kong, said Asian currencies were also benefiting from a pick up in demand for yield that has been seen in the past few weeks.

"With slightly weaker Asian currencies in the last two sessions, it seems attractive for traders to re-enter the long Asian trades," he said.

Elsewhere, the Singapore dollar gained about a fifth of a percent to 1.5226 to the US dollar, supported by data showing Singapore's economy grew at a stronger-than-expected annualised rate of 7.6% in the first quarter.

Analysts at ABN AMRO said the data together with the Chinese yuan band widening should support the Singapore dollar, which it estimated was trading just eight basis points above the mid-point of its secret trade-weighted band.

The Singapore dollar came under pressure last week amid weak economic data and a sharp fall in local interest rates.

"We remain upbeat on a stronger Singapore dollar, especially in a general weaker dollar-Asia trend, with our year-end forecast at 1.4700," ABN AMRO analyst Shiang Hue Lye said in a note.

Asian currencies showed little immediate reaction to a weekend meeting of Group of Eight finance ministers. The G8 communique made no mention of currencies and ministers said there was no discussion on foreign exchange. - Reuters



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