Asian banks halt dollar's slide

[FaGal]

Asian banks halt dollar's slide

Source: BBC News


The dollar regained some lost ground against most major currencies on Wednesday after South Korea and Japan denied they were planning a sell-off.
The dollar suffered its biggest one-day fall in four months on Tuesday on fears that Asian central banks were about to lower their reserves of dollars.

Japan is the biggest holder of dollar reserves in the world, with South Korea the fourth largest.

The dollar was buying 104.76 yen at 0950 GMT, 0.5% stronger on the day.

It also edged higher against both the euro and the pound, with one euro worth $1.3218, and one pound buying $1.9094.

Concerns over rising oil prices and the outlook for the dollar pushed down US stock markets on Tuesday; the Dow Jones industrial average closed down 1.6%, while the Nasdaq lost 1.3%.

Reassurances

The dollar's latest slide began after a South Korean parliamentary report suggested the country, which has about $200bn in foreign reserves, had plans to boost holdings of currencies such as the Australian and Canadian dollar.

On Wednesday, however, South Korea moved to steady the financial markets. It issued a statement that "The Bank of Korea will not change the portfolio of currencies in its reserves due to short term market factors".

Japan, too, steadied nerves. A senior Japanese Finance Ministry official told Reuters "we have no plans to change the composition of currency holdings in the foreign reserves, and we are not thinking about expanding our euro holdings".

Japan has $850bn in foreign exchange reserves.

At the start of the year, the US currency, which had lost 7% against the euro in the final three months of 2004 and had fallen to record lows, staged something of a recovery.

Analysts, however, pointed to the dollar's inability recently to extend that rally despite positive economic and corporate data, and highlighted the fact that many of the US's economic problems had not disappeared.

The focus has been on the country's massive trade and budget deficits, and analysts have predicted more dollar weakness to come.


Story from BBC NEWS:
http://news.bbc.co.uk/go/pr/fr/-/2/h...ss/4289659.stm
Published: 2005/02/23 10:44:59 GMT

© BBC MMV

[FaGal]

Dollar Gains as Japan, Korea Say They Won't Sell U.S. Currency

Source: Bloomberg

Feb. 23 (Bloomberg) -- The dollar gained after Japan and South Korea said they have no plans to reduce their holdings of the U.S. currency and Taiwan said it hasn't been selling.

The announcements by Japan, Korea and Taiwan, which hold three of the world's four largest currency reserves, came a day after the Bank of Korea sparked the biggest drop in the dollar against the euro in more than six months by saying it planned to change the composition of its holdings.

``They're trying to put out the fires caused by the comments on diversification yesterday,'' said Toshi Honda, a currency strategist in London at Mizuho Corporate Bank, a unit of Japan's biggest lender. ``Today's denials are having an impact, and we're seeing the dollar rebound.''

The U.S. currency rose to 104.80 yen at 9:37 a.m. in New York, from 104.04 late yesterday, according to EBS, an electronic foreign-exchange dealing system. It appreciated to $1.3207 per euro, from $1.3259. The yen weakened to 138.42 versus the euro from 137.95. Honda said the dollar may gain to 106.50 yen within two weeks.

The U.S. currency fell the most in four months against the yen and lost 1.5 percent versus the euro yesterday after a Korean central bank report to legislators on Feb. 18 showed it plans to diversify holdings and buy Australian and Canadian assets.

U.S. dollars account for a majority of the world's foreign- exchange reserves, which are holdings of foreign currency at central banks. The dollar share was 63.8 percent at the end of 2003, down from 66.9 percent two years before, according to International Monetary Fund figures released in April last year.

`More Positive'

``The story is a little bit more positive for the dollar today,'' said Brian Taylor, chief currency trader at Manufacturers & Traders Trust Co. in Buffalo, New York, with $50 billion in assets. ``A lot of market participants, especially hedge funds, are seeing a good opportunity to buy back some dollars.''

Taylor said the U.S. currency will trade between $1.32 and $1.3230 today.

Japan's currency began its decline today after a government report showed exports grew at the slowest pace in more than a year. The yen is down almost 3 percent from its five-year high of 101.69 per dollar, reached Jan. 17, on concern the Japanese economy will struggle to recover from recession.

Masatsugu Asakawa, director of the foreign exchange markets division at Japan's Ministry of Finance, said the country has no plans to diversify its reserves. ``At this stage, we don't have such plans'' to diversify reserves, Asakawa told Bloomberg at the ministry in Tokyo.

Taiwan, Singapore

Taiwan's central bank said in an e-mailed press release in Taipei that it hasn't been selling dollars. Taiwan, Korea and Japan have a combined total of $1.26 trillion in reserves. Singapore's $112 billion of reserves are held in a variety of currencies and assets, the Monetary Authority of Singapore said today in an e-mailed response to a question from Bloomberg News.

The Bank of Korea's press release today followed the won's appreciation to more than 1,000 against the dollar for the first time since November 1997. ``The Bank of Korea will not change the portfolio of currencies in its reserves due to short-term market factors,'' the bank said.

The dollar remained higher against both the yen and the euro after the Labor Department said U.S. consumer prices, excluding food and energy costs, increased 0.2 percent in January for a fourth month. Also today, the Federal Reserve will release minutes of its policy meeting on Feb. 1 and Feb. 2.

`Hammer Blow'

Some currency strategists, such as T.J. Marta at RBC Capital Markets in New York, said today's rebound in the dollar may be limited on concern foreign central banks will continue to reduce holdings of the U.S. currency.

``The fact that the dollar didn't come back even more suggests the reality is the reserve diversification is going to another hammer blow,'' he said.

In Europe, the euro stayed lower after an industry report showed a drop in business confidence in Germany, suggesting the region's largest economy may struggle to recover from a contraction in the fourth quarter.

The Munich-based Ifo economic institute said its business sentiment index fell to 95.5 this month from 96.4 in January. The median forecast in a Bloomberg survey of economists was 96.7. The euro is down 2.3 percent so far this year, in part on expectations the interest-rate gap between the euro region and the U.S. will widen as economic growth rates diverge.

European Rates

``Any expectations of interest-rate hikes in Europe have been put well back to the end of the year,'' said Simon Derrick, chief currency strategist in London at Bank of New York. ``I can't see any reason why anyone would be buying euros to invest in Europe.''

The European Central Bank's benchmark interest rate is 2 percent, unchanged since June 2003. The U.S. Federal Reserve has lifted its target rate six times since June 2004, to 2.5 percent. The Fed may lift the rate to 3.75 percent by year-end, according to the median forecast in a Bloomberg survey published Feb. 9.

Japan's currency fell the most in a week against the euro today after government figures showed export growth in January slowed to 3.2 percent from a year ago, compared with December's 8.8 percent gain. The slowdown suggests overseas demand may not be strong enough to pull the nation's economy out of recession.

``Exports are already the last resort for Japan's recovery,'' said Takashi Toyahara, a currency trader in Tokyo at Nomura Securities Co., Japan's biggest brokerage. ``That's undermining confidence on the yen.''

Japan unexpectedly slipped into recession last year as exports faltered and consumer spending shrank, a government report showed on Feb. 16. Net exports, or the difference between exports and imports, subtracted from gross domestic production in the fourth quarter.

Imports rose 11.6 percent, and the trade surplus shrank to 200.8 billion yen ($1.92 billion), the Ministry of Finance report today showed. The median forecast in a Bloomberg survey of economists was for a 509 billion yen surplus.



To contact the reporter on this story:
Vivianne C. Rodrigues in New York at at vrodrigues@bloomberg.net
Jake Lee at jlee127@bloomberg.net

To contact the editor responsible for this story:
Dan Moss at
at dmoss@bloomberg.net.

Last Updated: February 23, 2005 09:39 EST

[FaGal]

Wed Feb 23, 2005 06:55 AM ET

By Yoo Choonsik

Source: Reuters

SEOUL, Feb 23 (Reuters) - Asian currency authorities scurried to control damage on Wednesday after a South Korean document referring to diversification of foreign exchange reserves sparked an across-the-board dollar sell-off against major currencies.

South Korea, whose reserves are the world's fourth largest at $200 billion, flatly denied diversification plans meant an exodus from the dollar, while Japan, the world's biggest holder of reserves, said it had no plans to fiddle with the composition of its funds.

"The plan meant that the central bank would diversify reserves more into non-government bonds and did not mean that it would sell current dollar holdings for other currencies," the Bank of Korea said in a statement on Wednesday.

It was referring to its report to parliament on Monday outlining its plans for 2005 that said it would diversify its reserves away from U.S. government bonds into higher yielding debt and into non-dollar currencies.

The dollar logged its biggest daily fall this year on Tuesday, dropping to multi-week lows against the yen and the euro, seven-year lows against the Korean won (KRW=KFTC: Quote, Profile, Research) and 22-year lows against the New Zealand dollar on the report.

It retraced some losses on Wednesday after the Bank of Korea's clarifications and Japan's vehement denial of any changes to its reserves policy.

"We have no plan to change the composition of currency holdings in the foreign reserves and we are not thinking about expanding our euro holdings," Masatsugu Asakawa, director of the Japanese finance ministry's foreign exchange market division, told Reuters.

Irked by the market's off-and-on speculation about their reserves, Taiwan's Central Bank of China said in a statement that it had not been selling U.S. dollars.

"The foreign media reports are inconsistent with facts. This press statement has been issued to set the record right," the bank said.

Japan, China, Taiwan and South Korea are the world's top holders of foreign exchange reserves, with nearly $2 trillion in their coffers combined.

FOREX INTERVENTION

The turmoil highlights the growing risks stemming from the Asian authorities' bulging dollar holdings resulting from years of heavy market intervention to prevent export-crimping rises in their national currencies.

Japan alone spent a record 20 trillion yen ($191.6 billion) in currency intervention in 2003 and a further 15 trillion yen in just the first three months of last year before suddenly quitting such market action.

The yen rose to five-year highs against the dollar last month, sparking market expectations Tokyo authorities might renew intervention.

Bloated dollar holdings in reserves means huge exposure to the risk of losses should the dollar fall, but trying to reduce them would cause the dollar to fall even more sharply.

Japanese Finance Minister Sadakazu Tanigaki, in an interview with Reuters earlier this month, said Tokyo had to be extremely careful in managing its reserves because of their sheer size. Japan's reserves totalled $844.5 billion at the end of 2004.

The biggest chunk of that pile is in U.S. dollars and any change to the composition could have an immense impact on exchange rates, particularly as Asia's purchases of dollar assets have effectively funded the United States' gaping current account and budget deficits.

Analysts say a diversification to non-dollar currencies was inevitable, not the least because of a growing acceptance of the euro, the European single currency that was born in 1999. Likewise, U.S. Treasuries are no longer seen as the only safe-haven investment.

The State Administration of Foreign Exchange, China's foreign exchange regulator, denied in December China was cutting U.S. dollar assets held in its foreign exchange reserves, saying it would not make changes based on short-term market moves.

But U.S. government data suggest Asian countries were diversifying assets to some extent, as their combined holdings of U.S. Treasury securities rose more slowly in 2004 than the rise in total reserves.

China's holdings of U.S. Treasuries rose 23 percent in 2004 while its external reserves jumped 51 percent, although the figures include Treasury holdings by the private sector.

"Suggestions that China is selling U.S. Treasuries are not correct, which have been denied by the Chinese government. The absolute amount of Treasury holdings are still rising," said Jun Ma, an economist at Deutsche Bank in Hong Kong.

"(But) the purchases of U.S. Treasuries in the incremental part of China's foreign exchange reserves have been declining."

Some analysts believe China has boosted its holdings of euros and yen to dilute dollar assets, which they estimate at 70-80 percent of the total reserves.

The make-up of external reserves remains a secret in many countries, though South Korea has been saying publicly over the last few years it wanted to diversify over time. ($1=104.38 Yen) (Additional reporting by Yoko Nishikawa in Tokyo, Kevin Yao in Beijing and Lee Chyen Yee in Taipei)



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[FaGal]

Source: Radio Free Europe

World: Signs Grow Of Dollar Losing Favor As World’s Reserve Currency

By Kathleen Moore

For years, central banks around the world have held most of their foreign currency reserves in U.S. dollars. Now, there are signs that central banks are shifting away from dollar assets and into other currencies, such as euros. That's mainly because the dollar's value has fallen so much in the past three years. Experts say the gradual shift away from the U.S. currency is likely to continue -- suggesting there's more dollar weakness ahead.

Prague, 24 February 2005 (RFE/RL) -- It began with Russia. Over the past few years, the Russian Central Bank has reduced the share of dollars in its foreign currency reserves.

Then Indonesia said it, too, was considering such a move.

On 24 February, Bahrain's central-bank governor said the euro is increasingly emerging as an international reserve currency.

And reports the next day -- later played down -- suggested South Korea planned to sell some of its dollar reserves.

Ashraf Laidi, a currency analyst in New York, said it's clear why "diversification," a trend by countries to hold more of their reserves in currencies other than the dollar, is a hot topic just now.

"This talk is really part of central banks' growing unease with holding on to a currency that has lost approximately 30 percent of its value over the last three years. It makes sense [for them] to hold on to something that does not lose its value," Laidi said.

Experts say it's difficult to say with certainty to what extent the shift is under way. Central banks often don't give out such information. When central banks sell large amounts of dollars, the dollar loses value in the foreign-currency exchange market.

But a survey last month by Central Banking Publications showed many central banks have increased the share of their reserves held in euros.

They may not be actually selling dollars -- just buying fewer dollar assets, such U.S. government bonds, and more denominated in other currencies.

Laidi said it's a gradual shift. "Russia two years ago started off with nearly 90 percent holdings in U.S. dollars, and now today that proportion in U.S. dollars has fallen to just below 80 percent," he said. "And some central banks are either considering or making some moves towards that. Many central banks don't disclose the exact denomination in which currencies they have foreign exchange reserves. But currency traders have reason to believe the move is under way, albeit in a gradual manner."

To be sure, not all players are diversifying. Japan, the biggest foreign holder of U.S. bonds, said yesterday it has no plans to increase the share of euros in its reserves.

But experts say any shift is important. One reason is that when central banks sell large amounts of dollars, the dollar loses value in the foreign-currency exchange market.

So any sign the biggest customers, central banks, are curbing their enthusiasm for U.S. dollar assets is bad news for the U.S. currency.

Gianluca Benigno from London's School of Economics said the trend is likely to continue. "The euro is an alternative reserve currency that the central banks are considering is becoming more liquid and important," he said. "It's likely to become a topic of discussion in the next months. It came already months ago when Russia started releasing news about this diversification strategy, There will probably be more news in the next months similar to this."

As Benigno notes, the shift also reflects the rising importance of the euro.

So could the dollar lose its status as the world's chief international currency? Experts say it's possible the euro will at some point rival the dollar. But Malcolm Sawyer, an economics professor at Leeds University, said that's still a long way off.

"I could see a time, maybe 10-20 years hence, when the euro and the dollar have equal status, but I think that is really some time off," Sawyer said. "We are still in a position where much trade is financed through the use of dollars and many things like oil are priced in dollars and dollars are widely accepted in many countries in the world. So I think that for a long time the preeminence of the dollar will continue, although relevant to the euro it won't be quite as preeminent as it has been."



Radio Free Europe / Radio Liberty © 2005 RFE/RL, Inc. All Rights Reserved.

[FaGal]

Commentary: The dollar's close call
www.iht.com - By William Pesek Jr. - Bloomberg News - February 28, 2005


What force of nature prompted South Korea suddenly to scrap plans to sell dollars? On Tuesday, the dollar was plunging as markets digested the South Korean central bank's announcement that it would diversify foreign-exchange reserves into other currencies.

By Wednesday, the bank said that it had no such plan, leaving traders scratching their heads.

Dumping dollars would be a logical move for the world's fourth-largest holder of reserves after Japan, China and Taiwan. South Korea, after all, is going against the tide in Asia by allowing its currency, the won, to rise. It no longer needs so many U.S. Treasuries, nor does it want to sustain huge losses as the dollar falls.

South Korea's hasty and counterintuitive about-face makes one wonder if the U.S. Treasury secretary, John Snow, made a call to Seoul.

It is hardly in the interest of the United States to see South Korea pull the plug on Treasuries. Such a move could prompt other Asian central banks to do the same, driving up U.S. debt yields.

Or maybe it was Japan, the biggest foreign holder of U.S. Treasuries, that was putting pressure on its neighbor. Shortly after South Korea's denial, the Japanese deputy finance minister for international affairs, Hiroshi Watanabe, referred to "wild" moves in the yen and said that Tokyo would "act when necessary" if its currency rose too rapidly. Asia hardly wants Japan to resume its yen-selling campaign.

South Korea's retreat from dumping dollars shows the bind that central banks are in. Asia's mercantilist tendencies have given rise to exchange-rate management efforts on a scale rarely seen.

Bretton Woods II is the name that economists have given to the system that unofficially replaced the post-World War II currency regime, which was based on a gold standard that collapsed in 1973. In the place of gold, many nations adopted the U.S. dollar as an anchor, formally or informally pegging their currencies to it. We may be seeing the demise of this new system, with South Korea in the vanguard.

"The risk of a disorderly unraveling of Bretton Woods II - a sharp correction of the U.S. dollar and of the U.S. bond market, a surge in U.S. long-term interest rates, and a sharp fall in the price of a wide variety of risky assets such as equities, housing, high-yield bonds and emerging-market sovereign debt - is growing," Nouriel Roubini of the Stern School of Business at New York University and Brad Setser of Oxford University said in a research paper this month.

As their findings suggest, the current system is looking more and more like a huge pyramid scheme. As long as Asian central banks stick together and buy dollar-denominated securities, things are fine.

Once they start selling, virtually everyone loses - central banks experience capital losses and economies become less competitive. Central banks have an interest in keeping the game going and in hoping that others will, too.

Yet last week's events underline "how vulnerable the dollar is to negative news," said Carl Weinberg, chief global economist at High Frequency Economics, referring to the dollar's biggest drop against the euro in six months. The news, Weinberg says, "unwrapped a lot of tightly-wrapped traders who were spring-loaded to sell greenbacks on adverse news."

Although holdings of Treasuries in South Korea are much smaller than those of China, Japan or Taiwan, its $200 billion of reserves may be at the forefront of trends to trim dollar holdings.

Central banks in Asia buy U.S. debt not out of altruism, but to hold down currencies in order to bolster economic growth. Monetary officials are in the unenviable position of having to buy a lot of dollar assets they know are likely to lose value over time.

Now may be as good a time as any for the region's central banks to avoid losses ahead of a possible surge in U.S. debt yields. Investors won't ignore the record U.S. current-account and budget deficits forever.

Yet Asian economies are in a "damned if you do, damned if you don't" situation.

South Korea seems to have chosen to let the won rise, and that is a good thing. Asian countries expend too much effort to weaken their currencies, worried about growth a quarter or two in the future. That distracts from the need to reform financial systems, improve corporate governance and promote entrepreneurship.

One hopes that the rest of Asia will follow South Korea's example. Rising currencies are a sign of confidence in an economy. They lower bond yields and bolster stock prices. Capital that a hard currency brings in can be more important than the increased trade that is attracted by a softer one.

In any case, the precarious state of the global financial system may leave Asia little choice in the matter.