Emerging Asia FX-Yen drives gains, rupiah in focus

SINGAPORE, Sep 5 (Reuters) Most Asian currencies rose on Tuesday after strong Japanese capital spending data prompted those heavily short of the yen to push the currency to two-week highs.

Other factors helped the Asian currencies, including foreign portfolio inflows into regional stock markets and a rise in the Chinese yuan, which this week hit its highest level since being freed from a virtual dollar peg last July.

A lot of attention was focused on the Indonesian rupiah ahead of a central bank review of rates on Tuesday. The rupiah was at a two-week high and has been buoyed by foreign investor inflows betting on a steady decline in yields.

The yen was quoted around 115.80 per dollar after Monday's data reinforced expectations for rate rises in Japan. Those expectations had been subdued by soft July inflation data.

The yen's rally was spurred by heavy squaring of short yen positions. The latest data from the Commodity Futures Trading Commission showed bets against the yen hit a record high in the week to Aug. 29.

The South Korean won rose to a two-week high around 955 per dollar. The Taiwan dollar was also at its highest in 2 weeks.

Sean Callow, Westpac Bank's currency strategist, said he would sell dollars for yen, positioning for further decline in the dollar before U.S. markets returned after Monday's Labor Day holiday.

Yet, the yen rally was more driven by ''fear and greed'' and short covering rather than fundamentals such as the strong capital spending and rising Nikkei average, he said.

Some of the Japanese data preceding this week's capital spending numbers had been weaker than expected, particularly the rise in the July consumer price index (CPI) that tempered market expectations of monetary tightening.

''Dollar/yen historically goes up by the stairs, down in the elevator. But unless the G7/IMF is huge, then this is not the big move,'' Callow said.

Callow was referring to the World Bank and IMF annual meetings taking place in Singapore later this month.

Th Indonesian rupiah rose to 9,060 per dollar ahead of a likely rate cut by the central bank on Tuesday. Markets were divided on whether the central bank would cut the one-month policy rate, now at 11.75 percent, by 25 or 50 basis points.

''Essentially, I expect them to cut at each meeting so long as rupiah is not under grave pressure,'' Callow said.

Shahab Jalinoos, ABN AMRO Bank's currency strategist, said he expected Bank Indonesia (BI) to cap the currency by intervening around 9,050 rupiah per dollar for a while but would eventually let the currency rise as other central banks in the region seemed to be doing.

''Low global volatility and Indonesia's relatively high carry suggest further foreign inflows are likely for now, pushing yields still lower.

''We suspect BI will continue to support dollar/rupiah by adding to reserves on moves towards 9,050, but a break below that level, i.e BI stepping away, would likely see heavy dollar selling as obvious support is lacking below that level,'' Jalinoos said in a note to clients.

REUTERS PB RK1018