Asian Currencies: Ringgit Weakens on Rate Policy; Won Advances

By David Yong and Kim Kyoungwha

July 28 (Bloomberg) -- Malaysia's ringgit fell, leading losses in Asian currencies, after the central bank unexpectedly refrained from raising interest rates amid the fastest inflation in 26 years.

The currency touched a three-week low after policy makers on July 25 kept the overnight policy rate at 3.5 percent for an 18th straight meeting, citing increased risks to the economy. Fourteen of 20 economists forecast an increase to 3.75 percent before the decision was announced after the market closed. South Korea's won gained after the government said the current-account was in surplus in June for the first time in seven months.

``The sell-off reflects the market's disappointment with the decision,'' said Kit Wei Zheng, an economist at Citigroup Inc. in Singapore. ``This will increase the likelihood that they will spend some reserves to defend the currency.''

The ringgit fell 0.5 percent to 3.2675 per dollar as of 4:56 p.m. in Kuala Lumpur, the lowest since July 7, according to data compiled by Bloomberg. The won climbed 0.3 percent to 1,006, according to Seoul Money Brokerages Services Ltd.

Eight of the 10 most-traded currencies in Asia outside Japan fell as the U.S. dollar extended gains after Congress passed legislation to stem foreclosures and prop up Fannie Mae and Freddie Mac, the two biggest sources of funding for U.S. mortgages.

Risks Increase

``While both the risks to higher inflation and the risks to slower growth have increased, the immediate concern is to avoid a fundamental economic slowdown,'' Bank Negara Malaysia said in a statement accompanying its rate decision. ``The appropriate monetary policy response will be taken'' should price increases spread beyond food and fuel.

The won has gained 4 percent this month, halting four months of declines, as policy makers supported the currency after the inflation rate rose to 5.5 percent in June, the highest in a decade.

``The atmosphere is turning favorable for the won,'' said Ko Yun Jin, a dealer in Seoul at Kookmin Bank, the nation's largest bank. ``Month-end export settlements may give an additional boost to the currency.''

South Korea had a current-account surplus of $1.82 billion for June, versus a $378 million deficit in May, the Bank of Korea said today. The current account is the broadest measure of trade, tracking goods, services and investment income.

The government this month forecast the nation would have a trade surplus of $3.8 billion in the second half of 2008, led by exports to China. It had a trade deficit of $5.7 billion in the first six months.

Central banks intervene in currency markets by arranging sales or purchase of foreign exchange.

Chinese Yuan

China's yuan fell 0.2 percent to 6.8325, ending two days of gains, after the Politburo said maintaining economic growth and curbing inflation are priorities.

The Communist Party's top decision-making body wants to maintain ``steady and relatively fast'' economic growth, state- run China Central Television reported on July 25. The yuan's 7.2 percent advance this year is eroding the value of overseas sales as manufacturers contend with the slowest domestic economic growth since 2005.

``The yuan's appreciation will slow significantly in the second half, especially in the fourth quarter,'' said Lu Zhengwei, an economist at Industrial Bank Co. in Shanghai. ``For the first time, the government replaces preventing overheating with maintaining growth among its top priorities.''

Thai Baht

Thailand's baht fell 0.1 percent to 33.46 per dollar in Bangkok on concern slowing economic growth and a court case will undermine Finance Minister Surapong Suebwonglee, raising political risks and deterring investors.

Surapong is among three current ministers, who also served in former premier Thaksin Shinawatra's cabinet, facing a lawsuit alleging wrongdoing in the creation of a state-run lottery in 2003. Thailand's Supreme Court accepted the lawsuit, state- controlled Channel 9 television reported today, without saying where it got the information.

``The market remains a hostage to politics,'' said Sompob Asavaritikrai, head of trading at Bank of Ayudhya Pcl in Bangkok. ``If the court rules it will take the case, it will create more political uncertainty. It will hurt investor confidence. It is going to be negative for Thai stocks and the baht.''

The Singapore dollar fell 0.3 percent to S$1.3628 against the U.S. currency as traders reduced bets the central bank will seek a faster pace of currency appreciation at its semi-annual review in October.

Inflation Forecast

The Monetary Authority of Singapore on July 24 raised its inflation forecast for the third time this year and warned of ``considerable downside risks'' to exports, saying currency gains were hurting overseas sales. The agency, which conducts policy by adjusting the Singapore dollar's value, said its current foreign-exchange stance is ``appropriate'' and predicted inflation will cool in the remainder of this year.

``The U.S. dollar will be supported against the Singapore currency this week as expectations for further policy tightening have eased considerably,'' said Han Sia Yeo, a currency strategist at Bank of America Corp. in Singapore.

Elsewhere, Vietnam's dong gained 0.1 percent to 16,780 per dollar, the Indonesian rupiah was little changed at 9,123 from 9,120 at the end of last week, and the Philippine peso was at 44.04, from 44.07 on July 25.

To contact the reporters on this story: David Yong in Singapore at dyong@bloomberg.net; Kim Kyoungwha in Beijing at kkim19@bloomberg.net.