Asian currencies decline as Fed comments bolster rate hike bets

Federal Reserve Bank Chair Janet Yellen holds a news conference where she announced that the Fed will raise its benchmark interest rate for the first time since 2008 at the bank's Wilson Conference Center December 16, 2015 in Washington, DC. With unemployment at 5-percent and the economy showing signs of strength, the Fed raised the interest rate a quarter of a percentage point and many experts believe the interest rate on short-term loans could go as high as one percent by the end of 2016. - AFP

SEOUL/KUALA LUMPUR: Emerging market currencies fell, led by the South Korean won and the Malaysian ringgit, as gauge of the dollar strengthened to the highest level in three weeks after Federal Reserve leaders spurred bets US interest rates will rise as soon as next month.

Both Asian currencies headed for their biggest declines in almost two weeks after Fed Chair Janet Yellen said Friday the case for tightening had strengthened, a message later reinforced by Vice Chairman Stanley Fischer, who said a rate increase in September is possible.

The won slid versus all of its 16 major peers as the odds that US rates will climb next month, as indicated by futures prices, jumped to 42% as of Friday from 22% a week earlier.

“Asian currencies are starting off the week on a weaker note as markets now assign a higher odds of a September hike from the Fed -- quite a big change from a few weeks ago when hikes were not being contemplated till late 2017 or early 2018,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd in Singapore.

The remarks by Yellen and Fischer were “consistent with a possible hike in September.”

The won dropped 1% to 1,125.13 per dollar as of 10:45 am in Seoul after hitting 1,128.48, the lowest level in a week and the biggest drop since Aug. 17.

Malaysia’s ringgit retreated 0.7% to 4.0435 per greenback. The MSCI Emerging Markets Currency Index dropped 0.7%.

The Bloomberg Dollar Spot Index, which tracks the dollar against 10 peers, rose 0.1% , after gaining 0.8% Friday, the steepest advance since June 27.

Selling of the dollar by South Korean exporters should limit the won’s decline amid the US currency’s renewed strength and as the end of the month approaches, Ha Keong Hyeong, a Seoul-based economist at Shinhan Investment Corp, wrote in a note Monday.

While the probability of a rate increase has grown, whether the Fed tightens or not will depend on upcoming US economic data, Ha wrote, adding that US manufacturing and job data later this week will be scrutinised.

South Korea’s bonds fell, with the three-year yield rising three basis points to 1.27% , and the 10-year adding two basis points to 1.45% . Malaysia’s 10-year bond yield climbed five basis points to 3.59%, according to prices from Bursa Malaysia. - Bloomberg