SINGAPORE, Oct 31 (Reuters): Asian currencies have taken a hit as regional stock markets have fallen out of favour with foreign investors, with the Taiwan dollar and Indian rupee expected to suffer the most from any further equity weakness.
Foreign investors have gone on their longest selling spree of South Korean stocks since October 1997 and heavy selling in Taiwan pushed shares there to a 14-month closing low last week.
Jitters about rising interest rates in the United States and Asia have hurt Asian stocks and ABN AMRO says the US$4.8 billion of shares dumped in India, Korea, Taiwan and Thailand in October is the largest sum ever recorded in the four markets.
Against this backdrop, regional currencies such as the Taiwan dollar and Indian rupee have hit multi-month lows. This marks a dramatic change of fortune for these currencies, which at the turn of the year were seen as top picks.
Analysts say the impact of equity flows on Asian currencies should not be underestimated, with a strong correlation between the two in Korea, Taiwan, India and Thailand and to a lesser degree in Indonesia and the Philippines.
Gross equity market flows in Korea, Taiwan and India are now as large as total exports, says John Cairns, head of research at IDEAglobal in Singapore.
He estimates that US$1 billion worth of outflows from Korean or Taiwan stocks would see about a 0.4 per cent fall in the Taiwan dollar and the won and about a 0.8 per cent drop in the rupee.
The impact on the Indonesian, Philippine and Thai currencies was expected to be larger at about 1.7/1.8 per cent given the relative size of the equity markets.
The Taiwan dollar and Indian rupee are reckoned to be the ones to watch in termss of further equity outflows.
Worries about Taiwan's economy, a narrowing trade surplus and rising borrowing costs have all undermined Taipei's equity market.