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Thursday, May 19, 2005

Korean Central Bank To Stop Buying Dollars: Updated

South Korea's central bank governor said yesterday that the bank will not intervene any further in foreign exchange markets. Although it is far from clear what impact this move will actually have, it implies that South Korea is now unwilling to undertake the intervention required to stem its currency's rise. The central bank has in recent times spent billions of dollars in the foreign exchange markets to contain the won. "The change of stance will have implications both in South Korea where a rising won will further erode exporters' margins and in the US, where it could hit demand for Treasuries and other dollar-denominated assets.With Japan, China and South Korea which together hold at least a third of the world's central bank foreign exchange reserves"..


The FT retracted on this later in the day, in the sense that - despite what the bank governor said, Korea continued to buy dollars yesterday. Anyone familiar with the history of this debate in Japan and Korea will be aware that this tends to happen. When I decided to post the FT report I imagined that the FT had 'factored-in' this unpredicatbility element, and that the fact they were publishing the article meant that this time it was for real. Obviously I over-estimated them: mea culpa.

"The Bank of Korea on Thursday backtracked on its comments that it did not plan to intervene further in the foreign exchange markets, after precipitating a sharp fall in the US dollar overnight.....

The central bank on Thursday confirmed that Mr Park had been quoted accurately but it nevertheless released a statement saying that he had been “misunderstood.”

“The Bank of Korea will take necessary measures whenever the currency markets are unstable. Especially, we will not sit idly by if speculative funds come in to exploit a groundless news report,” it said."

Masochists can find the whole text of the governors speech here, to see for themselves.

Not completely without interest here might be this comment at the end of the FT original article: "The dollar moved lower on foreign currency markets on Wednesday afternoon, as the FT report of Mr Park’s remarks emerged."

Winding this sorry story up, this latest report in today's FT might not be without importance in understanding events: "South Korea’s economy slowed sharply in the first quarter, as domestic demand did not recover fast enough to offset slowing exports." ie there is economic pressure to stem the rise in the won. Bottom line: don't expect S Korea to stop buying dollars anytime soon. Phew, I'm glad that's done :).

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