Published March 3, 2009

Risk aversion drives US$ to fresh highs

S$ revisits Dec '06 lows; Indian rupee tumbles to fresh all-time nadir

By LARRY WEE

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(SINGAPORE) The US dollar exploded against its Asian counterparts on rising financial sector worries yesterday, scaling fresh multi-year highs against the Singapore dollar, Malaysian ringgit, Thai baht, South Korean won, Taiwan dollar and Indian rupee.

The Singapore currency touched S$1.5550 to the greenback - a level not seen for the past couple of years.

The US dollar's fortunes rose as Wall Street soured last week on news that the US government had converted US$25 billion of Citigroup's preferred shares to common stock, which fed worries of an eventual nationalisation that - if it happens - would leave its shareholders high and dry.

Risk aversion fears deepened by Friday, on talk that US insurance giant AIG may announce further heavy losses of as much as US$60 billion this week.

Then yesterday, the sombre news coming out of another banking giant, HSBC, added to the gloom.

The US dollar surged to near 2006 highs of S$1.5550 and 3.7275 ringgit, and a fresh all-time high of 51.82 rupees.

Elsewhere in the region, the baht notched a fresh two-year low after the Thai Finance Minister predicted further rate cuts at home, the Taiwan dollar was forced to a fresh 61/2-year low and the won finished almost 3 per cent worse off after challenging a fresh 11-year low of 1,595 won per US dollar.

DBS senior currency economist Phillip Wee said that on the current account side, we may also be witnessing a continuing adjustment to the deep global imbalances built up over the past six years.

He explained that between 2002 and 2008, the US dollar lost considerable ground because the US consumer went on a spending spree backed by surging house prices at home. These days, however, the reverse is taking place, and the US dollar is thus going the other way.

'There appears to be a big shortage of US dollars out there because the Americans are now trying to save rather than spend, which also means that Asia's exporters have less US dollars to sell,' he said.

'At the same time, we are witnessing capital outflows from the region's stock markets, which just adds to the case for selling Asian currencies in favour of the US dollar.'

Yesterday, the stock prices of Singapore's big three banks were punished with outsized losses of 6 to 9 per cent, which in turn contributed to a loss of more than 3 per cent for Singapore's benchmark STI stock index by the Asian close.

And with several other Asian stock indices also suffering painful losses of at least 3 per cent each - if not more - the reaction was swift to follow on the currency side.

Standard Chartered Bank researchers suggested yesterday that, compared to a month ago, speculators seem to be increasing their overbought US dollar (USD) positions again. At the same time, a study of their clients' real money flows at end-February suggests an increase in real money flows which continue to support the greenback versus its Asian counterparts ex-Japan (AXJ).

'Real money or relative return asset managers continue to be net buyers of USD-AXJ and remain the driving force behind USD-AXJ gains . . Real money selling of AXJ equities was a leading indicator for AXJ currency weakness in 2008. For 2009, we think that real money buying of AXJ equities will similarly signal the end of AXJ currency weakness. We continue to watch for any signs of that - which remain absent for the time being,' the researchers said.

Down Under, meanwhile, the Australian dollar suffered despite surprisingly strong numbers coming out more recently, at least partly because it has been dragged down by the New Zealand dollar.

The latter slid below 50 US cents yesterday, for the first time since December 2002, while - at its 63.5 US cents close yesterday - the Australian dollar is still comfortably above its February low of 62.5 US cents. As a result, the New Zealand dollar's 4.6 per cent loss versus the greenback over the past fortnight has been roughly double that suffered by its closest neighbour.