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ASIAN currencies came under fire against the US dollar yesterday, led by losses on regional bourses.
Hong Kong's Hang Seng Index plunged 194.9 points to 18,058.49, while Japan's Nikkei 225 shed 0.8 per cent to 9,786.82. Other exchanges bled early in the day before recovering later.
The heavy selling triggered a rush out of Asian currencies that forced the Indonesian rupiah down to 10,060 per US$ from 10,025, and the Korean won down to 1,263.7, from 1,252.5.
The Philippine peso plunged to 47.745 against the US$ early yesterday - its lowest point since May 18.
The Singapore dollar weakened against the US$ to 1.4602. It also weakened against the euro, British pound, Australian dollar and Japanese yen.
Dollar Index rises
The Dollar Index used by the ICE to track the greenback against the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona rose from 80.909 to 80.921 yesterday - its highest level since May 20. The index has risen 3.3 per cent from the year's low of 78.334 on June 2.
The Korean won dropped for a second day versus the US$ after North Korea handed 12-year prison terms to two US reporters accused of illegal entry. The two women journalists were detained near the North's border with China in March while reporting for San Francisco-based Current TV, co-founded by former US vice-president Al Gore.
According to some reports, investors are worried that a three-month stock rally may have been overdone, contributing to yesterday's Asian currency sell-off.
JP Morgan identified three factors that will determine the sustainability of the sell-off.
The first is the stability of the US Treasury market. In this respect, a three-year US$30 billion auction will be watched closely to gauge the strength of demand for bonds. 'Thus far, indirect bidders (representative of foreign central banks) have shown few signs of withdrawing support for US Treasuries or the US dollar,' JP Morgan said.
Second, the strength of the consumption recovery will be put to the test when May's US retail sales are released tomorrow. A stronger-than-expected result would suggest that higher bond yields that price in robust recovery are justified.
The third factor is May's US consumer price index data, which will show whether the current rate of consumer spending presents an inflation risk - as five-year Treasury Inflation Protected Securities (TIPS) breakeven spreads are already pricing in 1.86 per cent in forecast inflation.
'It is this third factor that could unhinge foreign demand for US assets and the dollar if the market believes that capital gains in US asset investments will be eroded by inflation,' said JP Morgan. 'Nonetheless, this would be a very volatile outcome, as global risk aversion would likely rise as well, which is negative correlated with Asia FX performance.'
Gold hits 2-week low
Meanwhile, two-year Treasury notes edged up to yield 1.395 per cent yesterday, while the benchmark 10-year note was little changed in price to yield 3.876 per cent after climbing as high as 3.91 per cent on Monday - its highest since November.
Gold fell yesterday to close at its lowest in two weeks, as the dollar continued to advance.
Oil rose above US$69 a barrel in New York, extending earlier gains, as the greenback fell against the euro, enhancing the appeal of commodities as a hedge.
Crude oil for July delivery rose as much as US$1.27 or 1.9 per cent, to US$69.36 a barrel in electronic trading on the New York Mercantile Exchange.
This week, the focus in Asia will be on China's trade numbers, retail sales and industrial production numbers.
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