Moody's cited high public debt and slow tax reforms for the downgrade but economists said the agency's timing was odd since the government's financial position was improving.
Indonesia's benchmark stock index reached a record high on Friday, lifting the rupiah a half of a percent higher against the dollar. Moody's raised the outlook on the country's debt ratings to positive from stable on Friday.
Earlier in the week, the Thai stock index hit a one-year high and the Philippine benchmark stock index went to a five-year high. "At the end of the day, fund managers around the world are quite bullish about the Philippines, Indonesia and Thailand, in fact the whole of Southeast Asia," said Philip Wee, treasury markets strategist at Singapore's DBS Bank.
"This is where the flows are going to. It's where they want to put their money."
South Korea's benchmark stock index also went to a five-year high on Friday and that pushed the South Korean won near to a seven-year high.
Taiwan dollar also edged higher close to a four-year high.
Foreign investors were net buyers of Taiwanese shares for the 12th straight session on Friday. In South Korea, foreign investors were net buyers of shares for the seventh consecutive session.
The Taiwan dollar rose to 31.52 per dollar, close to December's four-year high of 31.50. The currency has gained 1.3 percent this year, making it Asia's second-best performer after the Philippine peso.
However, Wee said traders would need something new - clues on when China might revalue its yuan currency, for example, or on the pace of further US interest rate rises - before they bid Asian currencies much higher.
"The whole market is like a headless chicken now," he said. "I don't think there's a straight dollar-view. The market is well divided."
The premium on China's non-deliverable yuan forwards rose for a second day after falling since the start of the year.
Hermann Remsperger, chief economist of Germany's central bank, kept up Europe's pressure on Asian central banks to let their currencies appreciate to take some of the burden off the euro as it rose against the broadly depreciating dollar.
Remsperger said co-ordinated international action was required to make Asian currency regimes more flexible.
The premium had touched a 3-1/2-month low of 3.7 percent on Wednesday.
China has said it would review its currency policy after the economy stabilised and its banks were stronger. Data on Friday showed that China's booming industrial sector was slowing.
The Singapore dollar gained a fifth of a percent after the government cut the top income tax rate and gave a boost to small and medium-sized companies in its annual budget statement.
The Thai baht weakened a tenth of a percent to 38.58 per dollar. IDEAglobal.com said the Bank of Thailand was likely to step in to buy dollars to check gains in the currency.