SEOUL/SINGAPORE (Reuters) - Asian central banks moved to prop up falling currencies on Tuesday to help prevent surging oil prices from stoking inflation in economies bracing for a global slowdown.
By Cheon Jong-woo and Melissa Chia
SEOUL/SINGAPORE (Reuters) - Asian central banks moved to prop up falling currencies on Tuesday to help prevent surging oil prices from stoking inflation in economies bracing for a global slowdown.
Central banks in Indonesia, the Philippines, South Korea and Taiwan were spotted selling dollars to support their currencies under pressure from inflation fears and wobbly stock markets, currency traders said.
Asian central banks have traditionally intervened to prevent the currency appreciation which would hurt exports, the main driver of growth for most of the region's economies.
!ADVERTISEMENT!But the focus of policy in some countries is now shifting to containing inflation with oil prices at record highs above $130 a barrel driving up costs across the economy and fuelling demands for higher wages.
"In choosing between a stronger currency and potentially higher rates it would seem authorities believe higher rates would be more detrimental for growth prospects," said Magnus Prim, chief Asia strategist at SEB in Singapore.
A strong domestic currency makes imports cheaper, helping limit the inflationary impact of soaring energy costs.
"This may become a common pattern in Asia," said another analyst in Singapore. "Central banks would need to draw down their reserves, given the turn from trade surpluses to trade deficits and much more sparse capital inflows," said the analyst who declined to be named.
In South Korea, where the central bank is under political pressure to cut interest rates, authorities intervened twice in one day to support the won, Asia's second worst performing currency this year after the Pakistan rupee.
Five currency dealers in Seoul said the Bank of Korea had sold as much as $800 million to support the won for the second time in a week. They reported another intervention later in the day, but could not estimate its size.
GROWTH DOWN, PRICES UP
The won, which has fallen 9.8 percent this year, has been under pressure from a soaring oil import bill, foreign selling of local stocks and a government plan to control overseas borrowing as the country braces for its first current account deficit since the Asian financial crisis 11 years ago.
The central bank said this month South Korea economic growth would likely slow to around 4.5 percent this year from 5.0 percent in 2007. The bank kept rates steady this month because inflation is running at a four-year high of 4.1 percent, above its target of between 2.5 percent and 3.5 percent, partly due to rising import costs.
But minutes from the Bank of Korea's meeting showed two of the central bank's six board members wanted rates to be cut, and that the central bank believed a weak won has more negative than positive effects on the economy.
"The won fell as oil prices jumped but we are worried that the won's fall might be excessive," Choi Jong-ku, head of the South Korean finance ministry's international bureau, told Reuters.
The won rallied on his remarks and hit a session peak after the second intervention, but analysts said they expected more weakness in the Korean currency and other currencies supported by central banks on Tuesday.
"Intervention doesn't have a long term impact," said Han-Sia Yeo, strategist, Bank of America in Singapore.
Three Manila-based traders said the Philippine central bank sold dollars around 43.70 per dollar, although the peso still fell to a low of 43.73, its weakest since November. One trader estimated the central bank had sold around $200 million.
The Philippine economy is feeling the heat of rising import costs and weakening demand for exports as the U.S. credit crisis and housing slump weigh on the global economy.
Imports of oil products jumped 87 percent in March while electronics exports fell almost 17 percent. The peso, Asia's top performer in 2007, has fallen 5.5 percent this year against the dollar.
Bank Indonesia was also suspected of selling dollars between 9,365 and 9,380 rupiah per dollar, two traders in Jakarta said. A trader in Singapore also said Indonesia's central bank had intervened. Most central banks in the region usually do not comment on currency interventions.
The rupiah has fallen 1.3 percent in the past month against the dollar despite its high yield, shunned by investors who fear that the central bank may not raise rates aggressively enough to temper inflationary pressures.
The country raised its subsidized fuel prices by almost 30 percent on Saturday, making it likely that inflation which is at a 19-month high near 9 percent will soon hit double-digits.
Traders in Taiwan said the central bank had intervened to support the currency, which fell for a third consecutive session as foreigners turned net sellers of Taiwan stocks.
But portfolio outflows were the only factor weighing against a currency backed by Taiwan's huge current account surplus, a central bank that is tightening policy and an administration that promises better ties with China.
Taiwan is also abolishing price controls on petrol and diesel from June.
(Additional reporting by Kevin Yao in Singapore; Writing by Vidya Ranganathan; Editing by Tomasz Janowski)
