EMERGING MARKETS-Thai baht hits two-month low as oil surge, elevated yields pressure Asian FX

By Shruti Agarwal

Sept 28 (Reuters) - Most Asian currencies weakened on Monday, with Thailand's baht leading losses, as elevated oil prices and rising US Treasury yields eroded the region's interest-rate advantage, while stocks also traded in the red.

The US-Iran standoff continued after the US rejected Iran's peace proposal over the weekend, spurring another leg higher in oil prices, keeping an October Fed hike in play and pressuring global bonds. Ten-year US Treasury yields held above 5.1% and the greenback is near a two-month high. US/

A prolonged period of higher energy prices is seeding inflation risks in oil- and natural gas-importing economies and threatening to widen fiscal gaps. Rising US yields also threaten to divert capital towards dollar assets, undermining emerging Asian currencies.

"US yields have risen faster than local yields across several Asian markets, widening the US yield advantage and weakening relative rate support for regional currencies," Lloyd Chan, FX strategist at MUFG said in a note.

Thailand's baht weakened as much as 0.8% to 33.635 against the dollar, its lowest since late July.

Currencies of oil importers that run a current account deficit, including Indonesia's rupiah, the Indian rupee and the Philippine peso, all depreciated between 0.1% and 0.4%. The three currencies have been the biggest laggards in the region this year, with Indonesia's rupiah faring worst, down over 7%.

The deterioration in relative-rate support has been particularly pronounced in Thailand and Indonesia, leaving both currencies exposed, Chan said.

Thailand's weak economic growth limits the scope for tighter monetary policy to counter external pressures, while Indonesia has increasingly relied on non-rate measures to support the rupiah even as foreign portfolio outflows have resurfaced, he added.

Data from last month showed Thailand's economy expanded 1.9% year-on-year in the second quarter, down sharply from 2.8% growth in the quarter prior.

Southeast Asia's second largest economy is expected to grow 2.5% next year and could reach 3% expansion within the next three years, the country's finance minister said on Friday, as the government pushes for new investments into key sectors.

Meanwhile, in Indonesia, higher oil prices are particularly challenging to the rupiah given existing concerns about the Indonesian government's limited fiscal room against its 3.0% fiscal deficit cap, threatening to undo a recent recovery after the rupiah touched a record low in June.

The Malaysian ringgit was down 0.3%, while the South Korean won weakened 0.2%.

The Taiwan dollar slipped 0.1%, on limited volumes, while Taiwan's equities were not trading on the day due to a holiday.

Asian equities were broadly lower, with South Korea's chipmaker-heavy stock benchmark .KS11 tumbling over 2% in catch-up trading following a holiday break.

Stocks in Thailand .SETI, Philippines .PSI slipped between 0.9% and 0.4%, while equities in Jakarta .JKSE fell as much as 1.1% to their lowest since July 30. Bucking the trend, Singapore stocks .STI rose 0.6%.

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