Asian Currencies: Peso Set for Weekly Gain, Korean Won Declines

By Aaron Pan and Lilian Karunungan

July 18 (Bloomberg) -- The Philippine peso led gains among Asian currencies this week after the central bank yesterday raised its benchmark interest rate by more than most economists forecast to quell inflation.

The peso headed for its first weekly gain in more than three months, as crude oil was poised for a record weekly slump in dollar terms. Lower energy prices may help reduce import costs for the Philippines, which buys almost all its fuel needs overseas. Five of the 10 most-traded Asian currencies rose this week, including Thailand's baht and Taiwan's dollar.

``The market is rewarding the central bank's hawkishness,'' said Nizam Idris, a Singapore-based currency strategist at UBS AG, the second-biggest currency trader in the world. ``The rate differential helps. For a more sustained strength in the peso, inflation numbers need to start to ease.''

The currency strengthened 2.6 percent this week to 44.485 as of 11:19 a.m. in Manila, from 45.662 a week ago, according to Tullett Prebon Plc. The peso will trade at 44.50 in the next month, Nizam forecast.

The central bank increased its borrowing cost by 0.5 percentage point, the most since 2000, to 5.75 percent. Bangko Sentral ng Pilipinas boosted the rate it pays banks for overnight deposits for the second straight month after inflation accelerated to a 14-year high of 11.4 percent in June.

The rate increase was predicted by 4 of the 20 economists surveyed by Bloomberg News, with the rest forecasting the central bank would match last month's quarter-point increase.

Korean Won Drops

Singapore's dollar has advanced 0.5 percent this week to S$1.3526, Vietnam's dong has added 0.3 percent to 16,795 and Thailand's baht gained 0.7 percent to 33.43. Taiwan's dollar strengthened 0.2 percent to NT$30.337 and Indonesia's rupiah rose 0.1 percent to 9,150.

South Korea's won led losses in the region as foreign investors reduced their holdings of local shares for the 30th straight day.

The currency pared last week's advance, the biggest in a decade, as the sale of stocks boosted demand for dollars and on speculation the central bank ended purchases of the won. Vice Finance Minister Kim Dong Soo said on July 15 that inflation may burden the economy as the government trimmed its economic growth estimate for this year to 4.7 percent from 6 percent.

``Foreign investors have to convert won into dollars after selling shares,'' which limited the won's strength this week, said Kim Yule, a foreign-exchange trader at BNP Paribas in Seoul. ``Another reason is that the Bank of Korea didn't come out to support the won this week.''

Curbing Inflation

The won declined 1 percent to 1,012.25 per dollar from a week ago, according to Seoul Money Brokerage Services Ltd. It rose 0.1 percent today, its first gain this week.

The won has slid 9.7 percent in the past year, the worst performance among the 16 most-traded currencies. It gained 4.8 percent last week as the central bank bought the currency to make imports cheaper and slow inflation.

A surge in oil prices and food costs quickened South Korea's inflation to the fastest in almost a decade, pushing the benchmark Kospi index down 19 percent this year.

Malaysia's ringgit fell for a third day on concern that a leadership struggle will distract the government from taking measures to tackle inflation and spur economic growth.

The currency traded near the lowest in a week after the Malaysian Institute of Economic Research cut its economic growth forecast for this year because of accelerating inflation and doubts over the country's political future.

`Ringgit Headwinds'

Malaysian police are considering legal options to compel opposition leader Anwar Ibrahim to give a DNA sample following an allegation he had sex with a male aide.

``The political noises will create headwinds for the ringgit and local asset markets because it affects investor sentiment,'' said Goh Puay Yeong, a Singapore-based currency strategist at Barclays Capital Plc. ``These are likely short- term concerns and we still remain bullish in the long term.''

The ringgit fell to 3.2410 per dollar from 3.2317 late yesterday, according to data compiled by Bloomberg. The currency is up 0.1 percent from a week ago.

To contact the reporters on this story: Aaron Pan in Hong Kong at apan8@bloomberg.net; Lilian Karunungan in Singapore at lkarunungan@bloomberg.net.