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Asia defends currencies even as stocks fluctuate wildly

Large foreign-currency reserves and overhauled regulatory systems have helped stability. Investors also seem to be better targeting which currencies are at risk.

By Correspondent of The Christian Science Monitor / October 29, 2008

Yen for yen: A customer checked out currency exchange rates in Tokyo Oct. 27. The yen has appreciated sharply.

Issei Kato/REUTERS

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Bangkok, Thailand

Asian stocks snapped a losing streak Tuesday, after scraping multiyear lows in recent weeks. Japan's Nikkei index closed up 6.4 percent, as South Korea saw a 5 percent hike in its main index. Hong Kong's volatile market posted double-digit growth a day after falling by almost as much.

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These fragile gains come in the face of increasingly gloomy forecasts for the region's export-led economies as the US and other rich countries slip into recession. As in other emerging markets, among the heaviest sellers of Asian assets have been US hedge funds and other foreign investors who need to raise cash in a hurry. This flight of foreign capital has dented confidence in stocks, bonds, and other assets.

But while markets have taken a pounding, the outflow of foreign money hasn't triggered a wholesale collapse in Asian currencies, as it did a decade ago when financial panic last swept the region. With the exception of South Korea and India, most Asian currencies have suffered only modest losses against the resurgent US dollar. By contrast, Brazil's real has fallen about 30 percent in the past three months.

Armed with massive foreign-currency reserves, fewer offshore borrowings, and overhauled regulatory systems, Asia is in far better shape to defend its currencies. Investors also seem to be making smarter bets on which currencies are at risk, compared with the contagion of 1997-98, when almost all Asian currencies were tagged as toxic. That pessimism became a self-fulfilling prophecy as capital flight ran down foreign reserves, forcing indebted countries to seek International Monetary Fund support.

This time around, South Korea has mounted defense of its currency, the won, after investors took fright over short-term dollar funding of local banks. It fell Tuesday to a 10-year low against the dollar, even as Korean stocks rose. Elsewhere, India has steadily sold dollars to arrest a slide in the rupee, while Indonesia saw a sharp drop Monday in its currency, the rupiah.

Asian currencies may yet feel the full sting of the global financial crisis if foreign investors continue to pull out and pressure mounts on central bankers, says James MacCormack, head of Asia-Pacific sovereign ratings for Fitch Ratings in Hong Kong. "It adds another layer of complexity to the problem for policymakers," he says. "In an ideal world, central banks would now be lowering interest rates and promoting growth. Lower interest rates in a climate when currencies are weakening could make it worse."

South Korea appears confident, however, that its currency can withstand the pressure. Monday, its central bank unveiled an emergency 0.75 percent cut in its benchmark interest rate. It also said it would loan money directly to struggling banks, as the US and Europe have done.

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