Chinese's surprise move to devalue the yuan, a looming Federal Reserve interest rate hike and weakening economic momentum in the region have created a perfect storm for Asian currencies, say analysts, who warn investors to brace for an extended period of volatility ahead.
Regional currencies suffered a second day of heavy losses on Wednesday as the People's Bank of China (PBoC) set its daily midpoint reference rate even weaker than Tuesday's devaluation, rekindling concerns around the health of the world's second largest economy.
The Indonesian rupiah led the declines, falling 1.7 percent against the U.S. dollar to its lowest level since July 1998, while the Malaysian ringgit slid 1.4 percent to its weakest since September 1998. The Singapore dollar, Taiwan dollar and Philippine peso, meanwhile, all touched five-year lows.
The Chinese central bank set the midpoint rate at 6.3306 per dollar prior to market open, sharply weaker than the previous fix of 6.2298 and Tuesday's close of 6.3231. That marks the weakest guidance rate for the currency since October 2012, according to Reuters.
The yuan – which is allowed to trade as much as 2 percent on either side of the official midpoint – subsequently fell 1.6 percent to trade at 6.4266 per dollar.
"Today's fixing has prompted another bout of volatility in Asian FX markets. It is a bit of a surprise that the PBoC has actually fixed the midpoint so close to the level that it closed at yesterday. There were some questions over whether China would really carry through with the market-driven pricing," said Mitul Kotecha, head of Asia Pacific FX Strategy, at Barclays. "This suggests a serious intent by the central bank," he added.