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.
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
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.
Cutting rates makes sense, as it lowers the cost of borrowing for
Korean companies and boosts their struggling stocks, says Bill
Belchere, a regional economist for Macquarie Bank in Hong Kong. …