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Last updated: February 8, 2011 10:53 pm
The South Korean won hit its highest level against the dollar since the onset of the financial crisis amid increased speculation that emerging market central banks – especially in Asia – will allow their currencies to appreciate to fight inflationary pressures.
South Korea’s government has stepped up its fight against inflation while the Bank of Korea has raised interest rates since they hit a low of 2 per cent last summer by 75 basis points in an attempt to rein in rising price pressures.
Many analysts expect the central bank to deliver a further 25bp interest rate rise after its policy meeting on Friday.
Neil Mellor, of Bank of New York Mellon, said the BoK would be aware that raising interest rates would have a limited effect in addressing short-term inflationary pressures compared with currency appreciation.
“With exports growing at a record pace in December, the country could certainly tolerate a stronger won,” he said. “Although, the BoK has been reluctant to allow the won to move back towards its 2010 highs above Won1,100 against the dollar, this may now be its most prudent option if it is to win its battle against inflation.”
The won rose to a high of Won1,101.90 against the dollar on Tuesday, its strongest level since September 2008. Traders noted strong demand from hedge funds.
The Taiwan dollar rose through the T29 level against the dollar, which the country’s central bank has been defending for a month, to rise 0.4 per cent to a 13-year high of T$28.897.
The Indonesian rupiah and the Philippine peso rose to three-month highs of Rp8,920 and 43.40 pesos, respectively, against the dollar.
Commodity-linked currencies remained resilient despite the People’s Bank of China delivering its second interest rate rise in more than six weeks.
After an initial drop on fears of reduced Chinese demand for raw material, the Australian dollar climbed 0.1 per cent to $1.0147 against the dollar while the New Zealand dollar rose 0.6 per cent to $0.7742. The Canadian dollar fell 0.5 per cent to C$0.9956.
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