By Jongwoo Cheon

SINGAPORE, Jan 28 (Reuters) - Foreign portfolio outflows

from South Korea triggered a round of heavy selling in Asian

currencies on Monday, driving the largest daily fall in the won

in 16 months and raising the spectre of sustained volatility in

the region's currency market.

The won fell 1.7 percent against the dollar, its largest

daily percentage fall since Sept. 26, 2011. The Taiwan dollar slipped to its weakest in more than four months.

Foreign investors reported their largest daily stock sales

in 16 months on Korea's KOSPI index.

Currency analysts said the sharp decline in the Asian

currencies appeared to be driven by a combination of factors:

profit-taking by foreign portfolio investors, the euro's rally

on Friday and some concern that the regional units had risen too

far against a weakening yen.

While those factors do not detract from the fundamental

attractiveness of Asia's growth and high-yielding markets, the

risk was that foreign capital outflows would lead to contagious

currency depreciation, helped by regional authorities concerned

about the erosion of competitiveness versus the yen, they said.

'There could be some further pullback in Asian FX. A higher

dollar/yen will drag the rest with it and Asian central banks

will be happy to see some local currency weakness,' said a

senior U.S. bank trader in Singapore.

Until recently, Asian currencies were major targets of

investors looking for higher yields with cheap money printed by

major central banks, especially the Bank of Japan (BoJ).

Last week, the BoJ announced its most radical effort yet to

end years of economic stagnation, after weeks of relentless

pressure from new Prime Minister Shinzo Abe for a greater push

to lift the economy out of recession.

That push for aggressive monetary easing has pushed the yen

down. On Monday, the dollar climbed as far as 91.25 yen, its

highest level since June 2010.

Asian currencies have been climbing against the yen, giving

policymakers in Korea and China much angst over a loss of

competitiveness. The won fell below the 12-per-yen level this

month, a level deemed highly sensitive for Korean electronics

exporters, before South Korean authorities stepped up rhetoric.

On Saturday, Bank of Korea Governor Kim Choong-soo said

Japan's monetary easing had 'created problems'.

Last week, China's foreign exchange regulator warned of

speculative capital inflows.

'The currency war story is starting to grab some attention

and people are buying dollars ahead in anticipation of weakening

of Asian currencies to catch up with the yen,' said a European

bank dealer in Manila.

HOT MONEY OUTFLOW

The won had risen 12.4 percent against the dollar between

late May and mid-January. It has been slipping since

mid-January, losing 3.6 percent. Monday's close of 1,093.5 to

the dollar was the weakest since Oct. 30 last year.

Implied volatility on the won, priced into one-month

options, jumped on Monday, rising 3 percentage points to above 9

percent.

That would be a warning sign for the region's central banks,

most of which have stated that they are apprehensive of big

swings in their currencies, not about fundamental weakness or

strength.

'To me what the authorities get angry about is very rapid

moves, as we have seen recently,' said Jonathan Cavenagh,

strategist at Westpac Banking Corporation.

'Once the dust settles, I think most countries around this

region won't be afraid of currency strength but would prefer it

in a gradual manner.'

Yet some currency traders were preparing for the won's slide

to accelerate repatriation from the country's stocks.

'We'd better prepare for a level of 1,100 soon,' said a

senior foreign bank dealer in Seoul.

The Indonesian rupiah slid more than half a percent and was

traded at levels around 9,790-9,800, although the central bank

was spotted providing dollars to the market, traders said.

Westpac's Cavenagh said it seemed like Monday's move was

merely a market shedding some heavy bullish positions in Asian

currencies, rather than any shift towards being short in the

Asians.

(Writing by Vidya Ranganathan; Additional reporting by

Miao-jung Lin in TAIPEI and IFR Markets' Catherine Tan; Editing

by Richard Borsuk and Robert Birsel)

((jongwoo.cheon@thomsonreuters.com)(+65 6870-3841)(Reuters

Messaging: jongwoo.cheon.thomsonreuters.com@reuters.net))

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