Steep declines in Asian currencies this week have delivered a stark reminder to investors that the region remains as vulnerable as ever to financial shocks from the west.

As investors scrambled for US dollars, seeking the safety of traditional havens, the South Korean won dropped 4.7 per cent over the week in spite of a rally on Friday and moves by authorities to slow the pace of its decline.

An index of 10 Asian currencies compiled by JPMorgan and Bloomberg has fallen 2.1 per cent against the dollar this week and is lower than the level at which it started the year.

The Australian dollar, a proxy for global commodities demand, dropped 5.6 per cent and is back below parity with the greenback. India’s rupee tumbled 4.7 per cent to a 28-month low and Malaysia’s ringgit declined 3 per cent.

Fears that the US is slipping back into recession and that the eurozone debt crisis is spinning out of control have triggered turmoil in global financial markets this week.

However, the declines in Asia have been particularly striking because until the start of this month they were 2011’s star performers in the currency world.

Traders said a number of Asian central banks, which routinely intervene to manage the values of their currencies, were actively buying their currencies in foreign exchange markets this week to stem the declines but were overwhelmed by the waves of selling by international investors.

Pranab Mukherjee, India’s finance minister, this week warned that the Reserve Bank of India would intervene in the market to curb excessive swings in the rupee.

“The reality is that it does not matter how confident we or anyone else may be on the medium-term outlook for China and the rest of Asia,” said analysts at Gavekal, a research house.

“If there is a recession in the US in the next 12 months or a major default event in Europe, Asian markets will continue to fall, in tandem with the US and Europe, despite the higher growth prospects.”

This week, even the seemingly unstoppable appreciation of the renminbi faltered in the face of a global rush for dollar liquidity.

While the Chinese currency traded onshore was broadly flat against the dollar, renminbi traded offshore, known as CNH, dropped more than 2 per cent as foreign investors liquidated positions.

Traders reckon Asian currencies will remain under pressure as long as global markets remain locked in “risk-off” mode and until US dollar funding concerns start to ease.

“The fear now is that market participants continue to reduce risk across the board.” said Paul Mackel, head of Asian currency research at HSBC.

“We have already seen relatively large outflows from Asian equity markets this year. If this liquidation spreads further to foreign bond positions, then the Indonesian rupiah, Malaysian ringgit and Korean won would be at greater risk.”

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