South Korea whacks dollar

JOHANNESBURG (Mineweb.com) -- The dollar spilled custard on Tuesday, recording its biggest fall in a week against the euro, and also falling against the yen, and most “commodity currencies” including the South African rand, Australian dollar and Canadian dollar. The drop was triggered by news that South Korea's central bank, with at least $200 billion in reserves, plans to diversify currency investments beyond the dollar. The bank is rated as either the world’s fourth- or fifth-biggest external owner of US Treasury bonds.

The news saw speculators push the Korean won to a seven-year against the dollar. The euro, which hit an all-time high of $1.3667 in December, strengthened to $1.3176 on Tuesday. The currency moves reversed a relatively stronger dollar that has been present in foreign exchange markets for most of this year. The rand, which on February 8 touched its lowest level since October 27, at R6.28, strengthened sharply on Tuesday to levels around R5.85 to the dollar. Gold prices increased just as sharply, as is typical in reaction on a softer dollar, to $431 an ounce, after looking to test $410 in recent days.

The news that South Korea would look to invest in other currencies is double-sided bad news for the dollar. First, such a move would entail the selling of dollars. Second, the US requires foreign exchange inflows of nearly $2 billion a day in order to finance its current-account deficit, which ballooned by 24 percent, over 2003, during 2004, to a record $617.7 billion.

The deficit, a record high 5.3 percent of US gross domestic product (GDP), and a record in nominal terms, is universally seen as the main driver behind the dollar’s protracted three-year bear market.

more