Asian c.banks defend currencies, but feebly

Traders and analysts said the authorities appeared to merely smooth the declines in their currencies, rather than attempt to halt a weakening trend that looked increasingly inevitable.

Analysts said the authorities seemed more willing than in the past few months to live with the decline of their currencies and use it to prop up their flagging exports.

"Asian central banks are intent and content with smoothing the depreciation of their currencies," said Claudio Piron, a strategist with JPMorgan Chase Bank.

He said fears that weak currencies would add fuel to already rampant inflation, gave way to concerns about faltering economic growth in export-dependent Asia.

South Korea's central bank sold an estimated $700-800 million on Wednesday, a relatively muted response to the won's losses compared with last month's interventions when the authorities were spotted offloading more than $5 billion in one day.

In India, where the rupee INRIN has lost 4.5 percent in just over a week, the central bank was seen selling dollars after the local currency hit a 17-month low.

In Thailand the authorities managed to put a floor under the baht THBTH at 34.15 per dollar, but the currency is expected to stay under selling pressure because of political uncertainty and slowing exports.

And in the Philippines the central bank's dollar sales went almost unnoticed and failed to stop the peso PHP from plumbing six-week lows.

Subtle shift

Until last month, rising oil prices, widening trade deficits and loose monetary policies had been pressuring several of Asia's currencies. Now the headwinds have become stronger given export growth is also slowing, the U.S. dollar is rising and there is fear of a recession in some major economies. The dollar has just hit a 7-month high against a basket of major currencies.

Some traders in South Korea sensed a subtle shift in Seoul's policy priorities, away from inflation-fighting and towards propping up growth.

The won KRW hit a 7-week low near 1,053 per dollar and has shed 5.5 percent of its value against the dollar in six weeks. The central bank sold about $15 billion in July to thwart its decline, but appears to have done far less this month.

"The authorities' stance is totally different from July," said Lee Jin-woo, a senior analyst at NH Investment & Futures Inc.

"They know that massive intervention has no effect amid a globally strong dollar. And the won cannot rise on intervention."

Back in July, the authorities had flooded the market with dollars to push the won back from lows near 1,050, and said they preferred to see it close to 1,000.

"The Bank of Korea looks like it is slowing retreating and pulling back its defence of 1,050, may be back the next psychological figure of 1,100," Piron said.

Yet the high inflation-low growth policy dilemma is not an easy one to resolve. Korean inflation is at an almost 10-year high, the trade deficit is widening.

Expensive oil is having a big impact on the country, which imports all its crude oil needs. The import price index climbed 50.6 percent in July from a year earlier.

Oil is also a big import item for India and most parts of Asia, except for Malaysia. India's trade deficit rose 40 percent in the second quarter of 2008 from a year earlier.

At the same time, Indian inflation, running at a 13-year high, has become a sensitive political issue ahead of elections in 2009.