Seoul: South Korea's won declined and other Asian currencies pared gains last week as concern about deficit funding in the European Union and a move by the Federal Reserve to raise its discount rate cooled demand for regional assets.

The Bloomberg-JPMorgan Asia Dollar Index, which tracks the 10 most-actively traded local currencies against the greenback, fell for a second day on Friday after the Fed raised the rate charged to banks for direct loans by a quarter point to 0.75 per cent. The increase spurred concern the global econ-omic rebound will slow after stimulus programmes are unwound.

"We've seen a knee-jerk sell-off in most currencies against the US dollar and that includes Asia," said Mitul Kotecha, head of global foreign-exchange strategy for Credit Agricole CIB in Hong Kong. "We'll see a bigger impact on the currencies more sensitive to risk, like the Korean won and Indonesian rupiah."

The won weakened 0.8 per cent last week to 1,160.5 per dollar and the Philippine peso dropped 0.1 per cent to 46.275, according to data compiled by Bloomberg. Indonesia's rupiah was little changed at 9,335 from 9,340 the previous week.

Holiday

Markets in China and Taiwan re-open this week. The Indonesian rupiah and the won each gained more than 28 per cent in the past year as near-zero rates in the US gave traders cheap financing for investing in developing nations.

The increase in the discount rate is another step in the Fed's gradual retreat from the unprecedented actions brought in to halt the deepest financial crisis since the Great Depression. The MSCI Asia Pacific Index of stocks fell 2.1 per cent Friday.

Malaysia's ringgit declined from a four-week high after the Fed increased the discount rate. The Fed left the benchmark overnight lending rate in a range of zero to 0.25 per cent at a meeting on January 27. "The discount rate hike lays the track for higher interest rates in the US, which is only a matter of time," said Zaki Mokhtar, head of foreign-exchange spot trading at RHB Bank Bhd. in Kuala Lumpur. "This is dollar positive and will sap the strength in regional currencies."

The ringgit's fall may be limited after Singapore said its economy will expand faster than initially expected this year. Gross domestic product will increase 4.5 per cent to 6.5 per cent in 2010 after shrinking 2 per cent last year, the trade ministry said.