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Asian currencies dropped this week, led by South Korea’s won, as concern Europe’s debt crisis will worsen outweighed the benefits to the region of China’s decision to end the yuan’s two-year peg.

The MSCI Asia Pacific Index of regional shares fell 0.5 percent in the week after the cost of protecting Greek debt from default climbed to a record. The won dropped the most in almost three weeks yesterday as overseas investors sold more Korean shares than they bought.

“The markets are reacting to the equities’ losses,” said Suresh Kumar Ramanathan, a currency strategist at CIMB Investment Bank Bhd. in Kuala Lumpur. “This is an indication of the risk-aversion trade. The Korean won came off quite a lot and that triggered the move in some Asian currencies lower.”

The won declined 1 percent this week to close at 1,215.19 in Seoul, according to data compiled by Bloomberg. The Singapore dollar fell 0.6 percent in the past five days to S$1.3940, the Indian rupee weakened 0.2 percent to 46.2865 and the peso dropped 1.2 percent to 46.445 per dollar.

The yuan rose the most in Asia this week, helping limit declines in most currencies and lifting the Indonesian rupiah. China, including Hong Kong, is the biggest export market for economies such as Malaysia, the Philippines, Singapore, South Korea, Taiwan and Thailand.

Budget Deficit

“The won is reacting to the risk aversion we saw overnight,” said Moh Siong Sim, a Singapore-based foreign- exchange strategist for Bank of Singapore Ltd.

The Philippine peso had its worst week since May as the government failed in its bid to sell debt after announcing that the budget deficit breached a ceiling.

The government sold just 2 percent of 10-year bonds it planned to sell over the counter on June 23, a day after saying the deficit in the five months ended May exceeded the cap for the first half. The government has just spent 42 percent of its annual budget allocation and will have to continue “stimulus spending,” Budget Undersecretary Laura Pascua said this week.

“The main concern is the deficit and uncertainty on how the incoming administration will address it,” said Speedy Delfino, a fixed-income trader at Bank of Commerce in Manila. “Comments on the need for stimulus spending also made the market wary because of its implication for the deficit.”

Yuan Policy

The yuan gained 0.5 percent in the past five days, the most since December 2008. The central bank fixed the reference rate at 6.7896 per dollar yesterday, 0.3 percent higher than on June 24. Indonesia’s rupiah rose 0.3 percent this week to 9,068, Taiwan’s dollar was little changed at NT$32.180, the Thai baht was steady at 32.41 and the Malaysian ringgit was little changed at 3.2515 per dollar.

The People’s Bank of China said on June 19 it would end a two-year currency peg and allow “two-way movement” in the yuan. Taiwan’s central bank on June 24 raised its benchmark rate for the first time since 2008, signaling confidence in the global economic recovery.

The rupiah climbed after the U.S. Federal Reserve pledged to keep borrowing costs low in the world’s largest economy, boosting the appeal of higher-yielding assets.

The U.S. central bank on June 23 left its benchmark rate unchanged in a range of zero to 0.25 percent. That compares with Bank Indonesia’s policy rate of 6.5 percent. Benchmark 10-year debt in the U.S. yields 3.11 percent, while similar-dated Indonesian bonds pay 8.01 percent.

‘Most Resilient’

“Among Asian currencies, the rupiah should be the most resilient as the authorities have done an excellent job in capping the dollar-rupiah’s upside to guard against inflation,” said Tim Condon, Singapore-based chief Asia economist for ING Groep NV. “This makes the fixed-income market an attractive carry trade.”

Overseas investors owned 151.7 trillion rupiah ($16.7 billion) of Indonesian debt as of June 18, about 40 percent more than at the end of last year, according to the finance ministry’s website.

Foreign investors bought $71 million more of Indonesian shares than they sold this week through June 24, boosting net purchases for this year to $801 million.