South Korean report sparks currency sale

A Call To Action


- Tom Abate, Chronicle Staff Writer
Wednesday, February 23, 2005

The dollar fell against the euro, the yen and other currencies Tuesday as traders dumped greenbacks after a report that South Korea's central bank plans to increase its nondollar reserves.

Against the euro, the dollar lost 1.5 percent, falling to $1.3260 from $1. 3068 in afternoon trading in New York, according to EBS, an electronic foreign- exchange system. It was the biggest drop since Aug. 6. The U.S. currency slid 1.3 percent to 104.13 yen from 105.54.

Central banks hold reserves to defend their currencies from speculative attacks and to help finance international borrowing and trade. The dollar has long been the world's leading reserve currency, although its position has been eroding.

A report from Reuters news service earlier this week disclosed the confidential diversification plan of South Korea's central bank, which holds roughly $200 billion in dollar reserves, making it one of the largest holders of U.S. currency. That spooked traders, who have been hearing a steady stream of bad news about U.S. budget and trade deficits.

"People really got excited, and a lot of them felt it was a significant statement,'' said Ray McKenzie, director of foreign currency products at the Chicago Mercantile Exchange.

The Australian and Canadian dollars also gained. The South Korean central bank statement that sparked the U.S. dollar dumping specifically cited the Australian and Canadian dollars as diversification candidates.

Economics Professor Don Nichols, a foreign-currency expert with the University of Wisconsin's La Follette School of Public Affairs, said Tuesday's sell-off reflects the market's reaction to fundamental weaknesses in the U.S. economy -- big federal budget deficits coupled with big foreign trade imbalances. These have forced the United States to borrow more, with foreigners holding a big share of U.S. debt.

The dollar's fall makes U.S. exports cheaper and could lessen the trade imbalance.

Authorities such as Federal Reserve Chairman Alan Greenspan have questioned when foreign buyers would lose their appetite for dollars, Nichols said.

Other dollar holders in Asia have hinted they were reluctant to keep buying. In January, for instance, the chief executive of the Hong Kong Monetary Authority said that other countries would not finance U.S. deficits indefinitely.

Barbara Rockefeller, a Connecticut foreign-exchange expert and newsletter publisher, said the Korean statement provided the catalyst for traders to act.

The dollar, which has been sliding for about three years, had regained some strength relative to the euro and other leading currencies at the start of the year. That trend recently reached a critical point that analysts had been watching closely for. Rockefeller said this turning point caused traders to start buying foreign currency, which added force to Tuesday's dollar slide.

"Traders were looking for an excuse to do what they wanted to do anyway, '' Rockefeller said.

No one knows how far the dollar will slide and how this will affect its position as the world's dominant currency, said Brian Bethune, director of financial economics with the Massachusetts consulting firm Global Insight.

Europe and Japan, the economic powers whose currencies are the strongest challengers to the dollar, have lower growth rates than the United States, he noted. They have even larger problems related to funding retirement and health care programs, he added.

Rockefeller said that while the dollar will probably continue to slide, she does not expect it to lose its position as the world's reserve currency, principally for reasons of global politics rather than economics.

"You have to be a military power,'' she said, adding that no other nation can match American might.

Bloomberg News contributed to this report.E-mail Tom Abate at tabate@sfchronicle.com.