Currency Madness

Between February 22 and March 10 we have witnessed in order the following sequence of statements by South Korean officials 1) South Korea would diversify out of US$ 2) denial of those statements 3) threats to intervene and buy US$ 4) actually carrying out that threat with a $2 billion currency intervention.

Meanwhile Japan 1) threatened to intervene 2) the Japanese PM threatened to diversify out of US$ 3) later the very same day the Japanese MOF denied that diversification threat.

Unlike most US$ bears, I did not think that South Korea was about to "dump the dollar" for the simple reason that no one in their right mind would make such a statement before doing so. The damage was done however, and the US$ has been declining since that press release. In early March, South Korea tried to undo some of the damage by intervening directly in the forex markets.

It seems to me like someone made a serious mistake talking about "diversification" without making themselves perfectly clear. Back in January we saw the exact same type of conflicting statements coming from China.

What is happening is rather obvious: There are a bunch confused and frightened bureaucrats out there. One set wants to get rid of US$ while they are "still worth something" another set from the same country is scared to death that exports will dry up if the US$ crashes. Those are the conflicting goals and the cause of those conflicting statements.

For now, those defending exports seem to have the upper hand as evidenced by many prior interventions from Japan and a very recent intervention from South Korea. The big question is how long can this last? I think it can go on longer than most people think. Unlike private investors, making a profit on currency reserves is not the top concern of central bankers. Their #1 concern is protecting their economy from collapse. If that requires taking a paper loss on paper dollars then so be it. It's a very unbalanced state of affairs that will blow sky high as soon as the US consumer is finally tapped out. Eventually gold is likely to stage a massive rise against all currencies because of this financial mess.

In the meantime, let's take a look at this recent sorry sequence of confusing statements and actions by foreign central bankers and bureaucrats.

Feb 22 2005
Dollar Declines as Bank of Korea Plans to Diversify Reserves

The dollar fell the most in more than two years against the yen and dropped versus the euro, Korean won and at least 30 other currencies after the Bank of Korea said it plans to diversify its reserves.

South Korea's central bank, which has a total of $200 billion in reserves, said in a Feb. 18 report to a parliamentary committee it will increase investments in assets denominated in currencies such as the Australian and Canadian dollars. The country's reserves are the world's fourth-biggest, behind Japan, China and Taiwan, according to data compiled by Bloomberg.

February 22, 8:47 PM EST
Dollar Up After S.Korea Signals Plans

The dollar rebounded against the euro and the yen on Wednesday after South Korea signaled that plans to diversify its foreign exchange reserves were not new and did not mean it would sell the U.S. currency.

The dollar posted its biggest daily fall in two months against major currencies on Tuesday as the market seized on reports that South Korea's central bank planned to spread its reserves, the world's fourth largest, among a greater variety of currencies.

March 10, 2005
Bank of Korea says will intervene if forex moved by speculation
SEOUL (AFX) - The Bank of KOREA said that it will INTERVENE in the market if the won moves too sharply, driven by speculation or non-market factors. "We will not allow the won to rise sharply if it moves beyond a reasonable level, with speculation or non-market factors dictating," the bank's governor Park Seung said at a press briefing after a rate-setting meeting

He said he was concerned that the won has risen more than three pct against the greenback so far this year while the euro and yen have fallen two pct, making it one of the currencies that has appreciated the most. "The won has been running up too fast. It's out of the normal pace," he warned

He called for a concerted international effort to tame foreign exchange rates, with the major countries adopting more flexible policies to help Washington reduce the twin deficits, a key source of the greenback's global weakness. He added that any market intervention by the central bank will be made only when a market failure emerges, stressing little change in its basic stance to leave the market in the hands of market players

March 8, 2005
Japan ready to Intervene in forex mart to counter excessive movements

TOKYO (AFX) - Hiroshi Watanabe, JAPAN's vice finance minister for international affairs, reiterated that Tokyo remains ready to INTERVENE in the currency market to counter excessive yen movements

Watanabe was speading at the Foreign Correspondents Club of JAPAN, almost one year to the day since Tokyo last INTERVENED in the international currency market

"Now, even though I have a strong concern (that) the Japanese yen is overvalued, I have no intention to make any verbal intervention," Watanabe said

If that's not verbal intervention just what is it?


March 10 2005
Dollar wobbles on JAPAN diversification talk

The US dollar wobbled in European morning trade on Thursday as Junichiro Koizumi, the JAPANese prime minister, appeared to hint that Tokyo was considering diversifying some of its reserves out of the greenback.

Mr Koizumi told a parliamentary committee: “I believe diversification is necessary. At the same time we need to consider what is profitable and what is safe, and make a comprehensive decision.”

Can Japan get its story straight intra-day let alone day to day?

The dollar fell on the news, chalking up a fresh two-month low of $1.3456 to the euro, before JAPAN’s ministry of finance rushed out a clarification.

An MOF official told Reuters: “We have no plan to change the composition of currency holdings in the foreign reserves and we are not thinking about switching dollar reserves to euro holdings”.

Hiroshi Watanabe, JAPAN’s vice minister for international affairs, also joined in the debate, saying: “it would be unwise to SELL dollars now under current market conditions”.

Meanwhile Korea actually carries out its threat to intervene in the Forex markets.

Elsewhere is Asia, the South Korean won jumped Won13 against the dollar to a seven-year high of Won989.2 as Korea’s consumer expectations index surged to its highest level since September 2002. This prompted Seoul to spend an estimated $2bn on intervening to buy dollar and send the won spinning back to Won1,000.2.