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Korean central bank will diversify reserves { April 6 2001 } Original Source Link: (May no longer be active)
http://www.bloomberg.com/apps/news?pid=10000080&sid=aNHPG4I67wPo&refer=asiahttp://www.bloomberg.com/apps/news?pid=10000080&sid=aNHPG4I67wPo&refer=asia
Korean Won Surges on Central Bank Plan to Diversify Reserves
Feb. 22 (Bloomberg) -- South Korea's won climbed the most in almost four years against the dollar after the Bank of Korea said it will diversify its foreign-exchange reserves and scale back its currency sales.
``If Asian central banks were to aggressively diversify out of dollars, which we don't think they are, it will obviously undercut the dollar quite significantly,'' strengthening Asian currencies, said Simon Flint, a senior currency strategist at Bank of America Corp. in Singapore.
The won also rose after North Korea suggested it may return to six-nation talks to dismantle its nuclear weapons program. The won tumbled 0.7 percent on Feb. 11 after the North pulled out of talks the previous day.
The won soared 1.7 percent to 1,006.10 against the dollar as of the 4 p.m. market close, its largest advance since April 6, 2001, according to Seoul Money Brokerage Services Ltd. It was the strongest close since Nov. 14, 1997.
The central bank plans to diversify investment targets for its $200.2 billion reserves from overseas government bonds into higher-yielding paper and currencies, including the Australian and Canadian dollars, it said in a briefing paper distributed to Korean lawmakers on Feb. 18. Parliament will discuss the plan on Feb. 24.
Some traders also bought won after overseas investors purchased the nation's stocks, said Roh Sang Chil, a currency trader in Seoul at Kookmin Bank, South Korea's biggest lender by assets. Global money managers bought a net $182 million of shares yesterday, the largest amount since Jan. 17, according to stock- exchange figures. They purchased a net $127 million today.
`Good Argument'
Changing the mix of reserves away from the dollar may weaken the U.S. currency, making ``one good argument against significant diversification,'' Flint said. ``No Asian central bank or authority wants to cause a significant downdraft in the dollar at this point in time. That's why they're intervening'' to sell Asian currencies ``in the first place.''
The central bank will let the market's demand and supply determine the won's rate, which will help rein in an excessive rise in the bank's reserves, the Bank of Korea's briefing paper said.
South Korea's currency also got a boost after North Korea said it will return to six-nation talks on dismantling its nuclear program if conditions for taking part are met, North Korean leader Kim Jong Il said. ``We will go to the negotiating table any time if there are mature conditions,'' state-run Korean Central News Agency cited Kim as saying late yesterday.
The U.S., South Korea, China, Japan and Russia have held three rounds of inconclusive talks with the isolated communist nation to persuade it to abandon its weapons in return for aid and diplomatic recognition.
`Softer Tone'
``The softer tone from North Korea on nuclear talks has probably helped the Korean won,'' said Mark Austin, head of currency strategy at HSBC Holdings Plc in London.
South Korea's won has advanced 16 percent in the past 12 months against the dollar, more than any other Asian currency. Fund managers overseas yesterday bought the most equities in a month and were net buyers today.
``Foreign investors bought a lot of local stocks, and they sold a lot of dollars for settlement, so there's upside pressure for the won,'' said Roh, a currency trader in Seoul at Kookmin Bank, South Korea's biggest lender by assets. North Korea's announcement ``is good for South Korea's security,'' he said.
Some investors are betting that Asia's economic growth is going to be more sustainable, putting more funds into the region, said Jan Lambregts, head of Asia-Pacific research in the treasury department of Rabobank Singapore.
`Positive for Asia'
``Fundamentals look fairly positive for Asian markets,'' said Jay Moghe, chief executive officer of Stork Capital Asia Pte in Singapore, which manages $25 million in its hedge fund. ``We like Asian stocks.''
The 42 economies of Asia excluding Japan will grow 6.3 percent in 2005, compared with a 6.7 percent forecast in September, the Asian Development Bank said on Dec. 7. The Organization for Economic Cooperation and Development predicted 2.9 percent growth for its 30-member countries on Feb. 17. A day earlier, Federal Reserve Chairman Alan Greenspan said the U.S. economy may grow as fast as 4 percent.
``There's appetite out there for Asian stocks, so we expect Asian currencies to do well this year,'' Rabobank's Lambregts said. ``Though growth will moderate, it still looks fairly good in Asia.'' The won may rise toward 1,000 this year, he said.
South Korea's central bank may have sold won today to protect exporters' profits, said Myung Gwan Byun, a treasury manager at Chohung Bank in Seoul.
`Closely Watching'
``It seems the Bank of Korea is trying to intervene'' and sell the won, ``but it appears to be a very small amount,'' Byun said.
The central bank is ``closely watching'' the won's rate against the dollar and the yen, said Oh Jae Kwon, head of the Bank of Korea's foreign-exchange team in Seoul. Oh declined to say whether the central bank will buy or sell the currency.
The won also gained after exporters bought the currency as they returned overseas dollar profits to settle their accounts at the end of the month, Kookmin Bank's Roh said.
Samsung Electronics Co., South Korea's largest exporter, exchanges profits denominated in foreign currencies into the won to minimize foreign-exchange risks, SungIn Cho, a Seoul-based public relations manager, said in a Jan. 11 e-mail.
China should change its pegged exchange rate because the government will be able to prevent any rapid movement in the yuan from hurting the economy, according to the Bank of Korea governor.
China's Yuan
``I don't think a change in its foreign-exchange regime would have a major adverse impact on China's economy,'' Song Ouk Heon, an official in the central bank's international relations department, said by telephone yesterday. He cited comments by Bank of Korea Governor Park Seung in an interview with London- based publication Central Banking published on Feb. 15. ``The government has the instruments to control the situation.''
A stronger yuan would raise China's purchasing power in Asia and make its exports costlier to buy abroad.
``Most people expect the Chinese to make a move on the yuan sometime this year,'' Rabobank's Lambregts said. ``That may be a reason why Asian countries in the longer term will be more accepting of currency strength.''
Last Updated: February 22, 2005 10:31 EST
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