February 22, 2005
Bloomberg
The dollar fell the most in more than four months against the yen and dropped versus the euro, Korean won and at least 30 other currencies after the Bank of Korea said it plans to diversify its reserves.
South Korea's central bank, which has a total of $200 billion in reserves, said in a Feb. 18 report to a parliamentary committee it will increase investments in assets denominated in currencies such as the Australian and Canadian dollars. The country's reserves are the world's fourth biggest, behind Japan, China and Taiwan, according to data compiled by Bloomberg.
``The market will now be looking to other central banks and what they will be doing, including the European central banks and Middle Eastern banks,'' said Mansoor Mohi-Uddin, head of currency strategy at UBS AG in London. ``The market has got nervous and has continued selling the dollar.''
The dollar weakened 1.4 percent to 104.11 yen at 10:11 a.m. in New York, from 105.54 late yesterday in Toronto, according to EBS, an electronic foreign-exchange dealing system. It dropped to as low as $1.3234 per euro, from $1.3068. U.S. markets were closed yesterday for President's Day. UBS forecasts the dollar will fall to a record $1.40 per euro by year-end.
The dollar remained lower after a Conference Board report today showed consumer confidence in the U.S. fell to 104 in February from a revised 105.1 in January, reflecting a decline in expectations for the next six months.
Australia's currency climbed as high as 79.21 U.S. cents today, the strongest in more than a year. Canada's dollar reached 81.40 cents, the highest in a month.
Support 'Disappearing'
``Support for the dollar is quickly disappearing,'' said Kenichiro Ikezawa, who manages $1 billion in overseas debt at Daiwa SB Investments in Tokyo. Korea's report ``feeds into suspicion that others are also seeking to cut their exposure to the dollar.''
The dollar has dropped for the past three years against the euro and the yen, in part on concern demand for U.S. assets will fail to match a widening current-account deficit. The gap was a record $164.7 billion in the third quarter, meaning the U.S. must attract $1.8 billion a day to fund the shortfall and support the dollar's value, according to Bloomberg calculations.
``I'd prefer not to own dollars,'' said Andrew Bosomworth, a former European Central Bank economist and a fund manager at Pacific Investment Management Co. in Munich. Pimco manages about $415 billion in assets. ``The list of fundamentals doesn't add up to a stack of positives for the U.S. currency.''
Korean investors, including the central bank, are the fifth- biggest foreign holders of U.S. Treasuries, with $69 billion as of December, the most recent figures available, according to the Treasury Department. Japan, the largest, has $711.8 billion. The Bank of Korea report was given to some legislators on Feb. 18 and reported by Reuters yesterday.
`The Anti-Dollar'
``The likes of Thailand, Taiwan and smaller, medium-sized central banks may follow suit'' in diversifying their reserves, said Stephen Jen, global head of currency research at Morgan Stanley in London. ``The euro is going to be the anti-dollar,'' he said.
Japan and China, the second-biggest holder of Treasuries, probably won't shift out of the dollar, Jen said. They ``cannot diversify while the dollar is under pressure.'' China has kept its currency pegged to the dollar since 1995. Japan sold a record amount of yen in the first quarter of last year to help stem its advance.
`Still Have Faith'
``In the long run I still have faith in the U.S. dollar,'' said Jen, who raised his forecasts for the currency on Feb. 10. Jen predicts the dollar will trade at $1.24 per euro and 96 yen at year-end, up from previous estimates of $1.32 and 92 yen.
Other currency strategists, including Meg Browne at Brown Brothers Harriman & Co. in New York, also said they expect the dollar to regain momentum after today's slide.
``There has been an overreaction'' to the Korean report, she said. Browne said the dollar may rebound to $1.30 per euro.
The Bank of Korea report, distributed to members of the parliament's finance and economy committee in advance of a debate scheduled for Feb. 24, also said the bank will expand investments into assets with lower credit ratings than the South Korean government. The plan must be approved by parliament.
``The sheer size of Korea's reserves makes it unignorable,'' said Tetsu Aikawa, currency sales manager in Tokyo at UFJ Bank Ltd., a unit of Japan's fourth-largest lender. ``That revives the memory in people's minds how badly the dollar was sold when Russia said it was diversifying.''
Russian Reserves
The dollar fell to a then-record against the euro on Nov. 23 after Russia's central bank said it may increase the amount of euros in its reserves. The dollar slid as much as half a percent against the euro on Jan. 24, after a survey sponsored by Royal Bank of Scotland Plc showed central banks boosted euro holdings.
Almost 70 percent of the 56 central banks surveyed said they increased exposure to the 12-nation currency, according to the survey conducted by Central Banking Publications Ltd., a London- based publisher, between September and December 2004.
U.S. Treasuries were the second-worst-performing major government market in the world last year, returning 3.5 percent to investors, according to Merrill Lynch & Co. indexes. Only Japanese bonds, which returned 1.3 percent, did worse among the world's largest government bond markets.
``To have a high proportion in U.S. assets is far from ideal, so it's good to diversify,'' said Mark Austin, head of currency strategy at HSBC Holdings Plc in London. HSBC forecasts the dollar will fall to a record $1.40 per euro and to 98 yen, the weakest in a decade, by the end of the year.
Japanese Economy
``South Korea wants to start picking up higher yields, so that includes moves in to the Australian currency and sterling, and they'll be buying government bonds,'' said Austin.
The yen's advance began earlier today on speculation Japan's economy will recover from its fourth recession since 1991. Traders may renew bets on the yen after it retreated 3 percent from a five-year high of 101.69 on Jan. 17, said Sabrina Jacobs, a currency strategist at Dresdner Kleinwort Wasserstein.
``Investors are increasingly realizing that the second-half recession in 2004 was the low point in Japan and that it's most likely getting better,'' said Singapore-based Jacobs. ``That's helping the yen.''
Finance Minister Sadakazu Tanigaki said on Feb. 20 Japan's economy will ``improve in the latter half of this year,'' after it contracted at an annualized 0.5 percent pace in the fourth quarter. The economy contracted for three straight quarters.
Japan's Cabinet office kept its assessment that the economy is recovering, in its February report released today. The government removed currency moves as a risk for the economic outlook in its report. A stronger currency may slow export growth by making Japanese goods more expensive abroad.
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