Note India joining Thailand in exchanging Old Maid Cards for "infrastructure projects".
Dollar falls amid fears central banks diversifying
By Steve Johnson in London
Published: February 22 2005 11:47
The US dollar fell sharply on Tuesday after South Korea re-ignited fears that central banks are looking to diversify their foreign exchange reserves away from the greenback.
The Bank of Korea said that “as foreign exchange reserves increase”, the Bank would “diversify the currencies in which it invests”, as well as targeting higher yielding investments, specifically mentioning the Australian and Canadian dollars, as well as non-government debt.
Though the story broke on Monday, it was only in Tuesday's Asian trade that the market reacted to the news.
“The dollar sell-off is a clear indication that the focus of the foreign exchange market seems to be shifting away from interest rate differentials and on to current account funding concerns and central bank diversification speculation that undermined the dollar considerably in the final quarter of 2004,” said Derek Halpenny, senior currency economist at Bank of Tokyo-Mitsubishi.
Seoul has $200bn of foreign exchange reserves, the fourth highest figure in the world, with analysts estimating that between 70 and 90 per cent of this is held in dollar-denominated assets.
South Korea is the fifth largest foreign holder of US Treasuries, owning $69bn worth as of December. Though this includes investments made by private banks and investment companies, the lion's share would be held by the central bank.
The Korean comments revived speculation that diversification away from the dollar is already underway, at least in the sense that as central bank foreign exchange reserves continue to rise, proportionately less of this new money is being invested in US assets.
Members of the Organisation of Petroleum Exporting Countries, along with Russia, have reduced the proportion of their reserves held in dollars during the past three years. Rasheed Mohammed Al Maraj, the governor of the Bahrain monetary authority, yesterday talked of the “eminence of the euro” becoming “more visible”.
And next week India could back a plan to use a portion of its $130bn of foreign exchange reserves to fund domestic infrastructure projects.
Simon Derrick, head of currency research at Bank of New York, said official holdings of US Treasuries increased by an average of just $17.7bn a month in the fourth quarter of 2004, when Asian reserves were rising by $62.6bn a month. In the three previous quarters, Treasury holdings rose by an average of $21bn a month while reserves increased by $38.9bn.
“Although some of these reserves are undoubtedly still being held in cash, it would nevertheless seem that there is strong evidence to suggest that the fourth quarter of last year saw Asian authorities increase the pace of diversification of their reserves,” he said.
The initial dollar sell-off was exacerbated by the greenback breaking through a number of technical barriers, triggering stop-loss selling.
This saw the dollar fall 1.3 per cent to a five-week low of $1.3235 against the euro, 1.3 per cent to Y104.13 against the yen, 0.6 to $1.9083 versus sterling, a seven-week low, and 2.6 per cent to R5.7638 against the rand as gold prices spiked higher.
The dollar also fell against Asian currencies, slipping 1.8 per cent to a seven-year low of Won1,005 against the South Korean currency and 0.7 per cent to T$31.175 against the Taiwan dollar, a four-year low, with sizeable inflows into Asian equity markets further strengthening Far Eastern currencies.
Tony Norfield, global head of forex strategy at ABN Amro, also saw signs of independent euro strength, with December eurozone balance of payments data showing showing healthy direct and portfolio investment inflows, even before any concerted central bank buying.
“This shows the euro rally in December was linked to real investment flows, not just to mad speculators,” he said. The euro firmed 0.7 per cent to £0.6935 against sterling.
The New Zealand dollar rose 0.6 per cent to a fresh 22-year high of $0.7297, prompting Sean Callow, currency strategist at IdeaGlobal, to speculate that the possibility of New Zealand intervening in the market for the first time ever was “growing daily”.
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