Asian currencies fell, led by the South Korean won and Philippine peso, on concern China's lending curbs will cool demand for regional exports and hinder an economic recovery.

The MSCI Asia-Pacific Index of shares dropped to its lowest level in 2010 after Reuters reported several Chinese banks will face an additional increase in the amount of cash they are required to set aside as reserves, citing sources the news company didn't identify. The won extended initial losses that were sparked by a report showing fourth-quarter gross domestic product growth eased to 0.2 percent from 3.2 percent in the prior three months.

"Asian currencies fell on talks that China has stepped up its policy tightening and asked some banks to raise their reserve ratios again," said Joanna Tan, regional economist at Forecast Singapore Pte. "This caused some knee-jerk risk aversion sell-off in Asian currencies and the yen rose."

The won dropped 1.3 percent to 1,165.50 per dollar as of 2:18 p.m. in Seoul and reached 1,166.50, the weakest level this year, according to data compiled by Bloomberg. The peso tumbled 0.5 percent to 46.47 and Malaysia's ringgit slipped 0.6 percent to 3.4205. The rupiah fell 0.4 percent to 9,380.

China's central bank earlier this month raised the reserve requirement for banks by a quarter-percentage point to 16 percent to curb record loan growth and prevent asset bubbles in property and stocks. The People's Bank of China kept one-year bill yields unchanged today for the first time in three weeks.

Eoin Treacy's view Asian currencies have been some of the better performers globally for much of the last year as it became evident that the root causes of the credit crisis did not affect the region's economies to the same extent as those of the USA and Europe. At least part of this strength was in response to currency inflows which sought to profit from the strength of the regions stock markets. This contributed to both the region's stock markets and their respective currencies moving upwards in tandem. However, China's need to tighten monetary policy and US restrictions on larger banks have contributed to heightened levels of investor anxiety. It may be instructive to compare the performance of stock markets with their respective currencies in an attempt to gain some further insight.

The Asian Dollar Index has been ranging above 110 since October as it consolidated the impressive advance from the March low. It broke upwards earlier this month, in sympathy with similar moves across a number of stock markets but has now pulled back into the previous range, making at least a retest of 110 more likely. A sustained move to new recovery highs is now needed to question scope for some further retracement of last year's gains.

The MSCI Asia ex-Japan Index has a relatively similar pattern, displaying the failed upside break and subsequent retest of the progression of incrementally higher lows. It needs to rally smartly from current levels if the consistency of the advance is to be maintained and further testing of underlying trading is to be avoided.

The Australian, New Zealand, Indian, and Taiwan stock market indices have all posted failed upside breaks. Korea and Thailand have failed at the upper side of their five-month ranges. The Hong Kong and Philippines markets have broken their progressions of rising reaction lows.

Singapore has pulled back sharply and is now testing the first area of potential support at the upper side of the previous range. However, an upward dynamic would be required to offset scope for a further test of underlying trading in line with the commonality of the region. Neither Indonesia nor Malaysia have pulled back to any great extent and have so far held their upward breaks. However, it would be unreasonable to expect them to hold their gains in isolation if neighbouring markets continue to pull back.

The Chinese A-Shares Index continues to range below the August high and needs to sustain a move above 3500 to indicate demand is regaining the upper hand. China remains the regional heavyweight and the economy's leash effect is a growing influence on dependent markets globally. From the above charts we can see that indices for Taiwan and Hong Kong have been some of the hardest hit so far, which is at least in part attributable to expectations of further monetary tightening on the Chinese mainland.

The Australian, New Zealand and Singapore Dollars show the most evidence of medium-term topping activity against the US Dollar. All three hit peaks late last year and have since posted lower highs. These would need to be taken out to question potential for some additional lower to lateral ranging. Against currencies such as the Korean Won, Taiwan Dollar and Indonesian Rupiah, the Dollar has rallied, forming a failed downside break and while the progression of lower highs remains in place, downward dynamics would be required to question scope for further US Dollar strength.

From the above charts, we see that the stock market pullback to date has seen a corresponding strengthening of the Dollar against the region's currencies. The recent strength of the Dollar supports the view that investors are repatriating profits and until upward dynamics in favour of the region's stock markets and currencies are posted, we will have little evidence that the current supply dominated environment has changed.