Saturday, July 28, 2007

Asian currencies sink as credit fears bite

Asian currencies sink as credit fears bite
By Joe Leahy in Mumbai and Jack Burton in Singapore
Copyright The Financial Times Limited 2007
Published: July 27 2007 10:11 | Last updated: July 27 2007 10:11

Asian currencies fell sharply on Friday on concern that the deterioration in the US housing market could raise credit costs and put a brake on the global economy.

The Australian dollar, Indian rupee, Indonesian rupiah, and Philippine peso were among the biggest losers as risk-averse investors moved to less volatile assets.

The Japanese yen was the region’s sole gainer as investors unwound carry trades, whereby they borrow in low-yielding currencies such as the yen for investment in other currencies or markets with higher yields. That drove the yen to a three-month high against the dollar and a six-week peak versus the euro.

“The real epicentre of this seems to be in the credit default swap market but what we’re seeing today is that it’s shifting to the equity side,” said Claudio Piron, Asia currency strategist with JP Morgan in Singapore.

He said crossover investors, such as hedge funds and fixed-income funds, were selling non-core equities portfolios, putting pressure on currencies such as the Indian rupee, as the process of “re-pricing risk” stemming from the turmoil in the US sub-prime mortgage market spread to other markets and investment instruments.

However, dedicated equities investors, such as mutual funds and pension funds, were not yet among the sellers.

The rise in risk aversion and the related move away from higher-yielding currencies and stocks in Asia follows negative housing data from the US this week.

This was reinforced by Countrywide Financial, the biggest US mortgage lender, which reported its third straight quarterly earnings decline after a growing number of borrowers fell behind on home-equity loan repayments.

Among the region’s currencies, the Australian dollar was down 2.27 per cent against the US dollar, as investors unwound carry trade transactions, at $0.8648, according to Reuters data.

The rupee, meanwhile, was down 0.44 per cent at Rs40.52 against the dollar, off a nine-year high of 40.20 hit on Tuesday.

The Indonesian rupiah fell as low as Rp9,240 per dollar, down more than 1.3 per cent and at its lowest level since mid-March.

The Philippine peso also fell as much as 1 per cent to 45.8 per dollar and the Malaysian ringgit was down by a similar percentage at a one-month low of 3.468 per dollar.

Adrian Foster with Capital Markets at Dresdner Kleinwort in Beijing said: “The Asian markets are dominated by real money instead of speculative money so I don’t think the downturn will last and markets will soon stabilise.

“The markets have been pretty frothy so what we’re seeing is that some of the speculative money is being taken away.”

He said Asia’s hefty foreign exchange reserves and sovereign funds would prevent large-scale deterioration in the region’s currencies and markets.

“We went through a similar period in February and the markets recovered, although the recovery this time may not be as strong.”


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