By Jongwoo Cheon
SINGAPORE (Reuters) - The rupee and Indonesian rupiah led slides among emerging Asian currencies in August as capital flowed out of the region on expectations the U.S. Federal Reserve will soon begin to reduce monetary stimulus.
While most regional units scratched out gains on Friday, the damage for the month was extensive.
The rupee has tumbled 10.4 percent against the dollar so far this month, which would be its largest monthly depreciation ever if it ends around current levels, according to Thomson Reuters data.
The rupiah has lost 5.9 percent so far in August, which would be its biggest monthly fall since November 2008.
The Philippine peso has slid 2.7 percent, which would be the largest monthly fall since May last year. The Thai baht has fallen 2.4 percent and the Malaysian ringgit has weakened 1.6 percent.
The Fed is expected to start scaling back its bond-buying programme next month. An upward revision to second-quarter U.S. economic growth bolstered the views.
"September will be a rough month for Asian FX, with the potential Fed taper and sustained nervousness towards emerging markets," said Emmanuel Ng, a foreign exchange strategist for OCBC Bank in Singapore.
When asked which Asian currencies will be most vulnerable, Ng said: "they are going to be the usual suspects, such as the rupee, the rupiah and the ringgit, as markets sniff out the weakest links."
Short positions in the rupee and some Southeast Asian currencies hit the highest levels since the global financial crisis in 2008 during the last two weeks as sentiment on regional currencies deteriorated, a Reuters poll showed on Thursday.
The rupee and the rupiah are seen as especially vulnerable to an anticipated reduction in the Fed's quantitative easing. Both India and Indonesia are struggling with growing current account deficits, slowing economic growth and strong resistance to implementing much-needed reforms.
Despite spreading gloom in South and Southeast Asian currencies, their Northeast Asian peers enjoyed monthly gains.
The South Korean won has risen 1.3 percent on capital inflows and exporters' demand for settlements. The Taiwan dollar has risen 0.7 percent.
Investors dedicated to emerging Asian markets are betting that Northeast Asian currencies will fare better than their Southeast Asian counterparts due to superior fiscal and current account positions.
Their high-tech exports have proved more resilient to the global slowdown, especially China's more recent slowdown, than Southeast Asian economies which are heavily reliant on exports of commodities and raw materials.
The ringgit rose as offshore funds covered short positions, but its upside was limited by dollar demand from custodian banks in Malaysia.
Those custodian banks bought dollars below 3.3000 to the ringgit, traders said.
The Malaysian currency is expected to stay weaker in September as investors are keeping an eye on if the Fed starts winding down quantitative easing.
"There are so many uncertainties, such as Syria, U.S. tapering and fund exits from emerging Asia," said a senior Malaysian bank trader in Kuala Lumpur, adding the ringgit is likely to fall further.
The ringgit saw some support at 3.3345 per dollar, the 50 percent Fibonacci retracement of its appreciation between 2009 and 2011.
But the Malaysian unit may weaken to 3.3640, its weakest level in May 2010, once the retracement is broken, analysts said.
The peso gained as overall strength in regional units caused investors to cover short positions.
The Philippine currency, however, gave up some of initial gains on dollar demand from local companies, traders said.
Despite improvement in sentiment, onshore players including lenders and corporates prefer dollars, they added.
"We could see a bit more upside in dollar/peso as it has lagged the bigger rises in dollar/rupiah and dollar/rupee," said a senior Philippine bank trader in Manila.
The peso may weaken to mid-45 per dollar in September.
Another trader said the peso may find support around 45.50, given increasing remittance inflows in the next coming months.
The rupiah edged up 0.1 percent to 10,910 per dollar in the interbank market as the central bank was spotted providing dollar liquidity and a day after Bank Indonesia announced further measures to shore up the currency, including rate hikes.
Banks in the country, however, still bought dollars above 11,000 for their customers, traders said, indicating investors did not see the new steps as sufficient to halt the rupiah's slide.
HSBC said Thursday's actions were constructive, but they may not be enough to support the rupiah.
"In our view restoring price discovery is still critical and more policy support will be needed to stabilize the IDR," it said in a note.
Forwards markets pointed further depreciation in the rupiah with one-month non-deliverable forwards to dollar weakening to 11,440.
The baht advanced on exporters' demand for month-end settlements and as some Japanese banks bought the currency.
Ten- and 5-year government bond yields also slid.
Still, investors hesitated to push the baht stronger than 32.00 per dollar, before July current account and trade data later in the day.
(Additional reporting by IFR Markets' Catherine Tan; Editing by Kim Coghill)