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Dollar's retreat supports Asia currencies, ringgit near 2-week high

Most emerging Asian currencies rebounded on Wednesday as the dollar retreated, but their strength may not last long due to the prospect of higher US interest rates.

[SINGAPORE] Most emerging Asian currencies rebounded on Wednesday as the dollar retreated, but their strength may not last long due to the prospect of higher US interest rates.

The Malaysian ringgit touched a near two-week high as government bond prices rose. The South Korean won gained as investors cut bearish bets, while sustained foreign stock selling limited its upside.

Indonesia's rupiah, however, edged closer to a 17-year low, catching up with the region's downtrend on growing expectations the Federal Reserve could raise rates as soon as September. Indonesian markets were shut for a Muslim holiday.

The dollar suffered its biggest one-day drop so far this month against a basket of major currencies as investors booked profits after it rose for most of the past four weeks.

Still, the greenback's long-term uptrend is seen intact and that would continue to hurt emerging Asian currencies, analysts and traders said.

"The dollar's slide and Asia FX's rebounds are transitory,"said Yuna Park, a currency and bond analyst at Dongbu Securities in Seoul.

"Once US interest rates rise, the dollar will follow that. So, it is better to buy dollar/Asia on dips."

The ringgit gained as much as 0.5 per cent to 3.7860 per dollar, its strongest since July 10.

Malaysia's government bond yields slid with the 5-year yield hitting 3.517 percent, the lowest since November 2013.

Local government bonds saw continued buying flows, mainly by foreign names, Maybank said in a client note.

That came even amid an ongoing graft scandal linking Prime Minister Najib Razak to troubled state-fund 1MDB. Singapore police have frozen two bank accounts to help with an investigation into 1MDB, which is being probed by authorities in Malaysia for financial mismanagement and graft.

"Despite the negative headlines, investors who hold a longer term view may still think that Malaysia's fundamentals are still relatively strong against peers," said Winson Phoon, a fixed income analyst for Maybank Investment Bank in Kuala Lumpur.

"The ringgit weakness, which we expect to dissipate, may in fact provide a good entry point," said Mr Phoon.

The ringgit was the worst-performing Asian currency so far this year, hurt by low commodity prices, slowing growth and political tensions.

The won gained in line with a rebound in overnight non-deliverable forwards as traders cut bearish bets on the currency.

The South Korean currency pared some of its earlier gains as foreign investors were set to become net sellers in Seoul's main stock market for a fourth consecutive session.

Offshore funds also sold the won and demand from exporters was low, traders said, reflecting doubts the currency could make further gains.

"Position adjustments provided good chances to add dollar holdings," said a local bank trader in Seoul.

"The foreign exchange rate stayed above 1,150. That indicates dollar interest is still there," said the trader, referring to dollar/won.

The rupiah lost 0.3 per cent to 13,380 per dollar, its weakest since June 9, when the Indonesian currency hit 13,384, its weakest since August 1998.

Offshore funds sold the currency on a fall in some government bond prices.

Local financial markets were closed from July 16 to July 21 to celebrate the end of the Muslim fasting month of Ramadan.

Investors were wary of possible intervention by the central bank to support the second-worst performing Asian currency so far this year.

Bank Indonesia's senior deputy governor Mirza Adityaswara said the central bank is always in the foreign exchange market when the rupiah is undervalued.

Some state-run banks bought the rupiah on dips, limiting its downside, traders said.