Reserves fall from record high on euro weakness

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Reserves fall from record high on euro weakness


Korea’s foreign reserves sank for the first time in five months.

And although market analysts say Korea has enough foreign reserves to weather the recent global financial turmoil, they also say the central bank needs to diversify its foreign reserve pool in order to minimize the impact of trouble in the euro zone.

According to the Bank of Korea Monday, the foreign reserve pool sank $5.97 billion to $310 billion in May. This is a turnaround from the record $316.8 billion recorded in April.

One of the primary causes is the continuing appreciation of the U.S. greenback against other currencies and the fall in the value of the euro, which is a major component of the reserves.

“The single biggest reason for the drop was the lower value of non-dollar assets when converted into U.S. dollars,” the BOK said in a statement. “The fall took place despite a rise in foreign reserve asset investment profits.”

Additionally the market speculates that the central bank might have tapped into its foreign reserves to intervene in the foreign exchange market to keep the won from devaluing against the U.S. greenback.

The won yesterday strengthened against the dollar to close at 1,180.10, 1.9 won lower than the previous day.

The appreciation was largely due to an overnight recovery on the Seoul main bourse, which added 18.72 points after plummeting more than 51 points on Monday.

However, in the last four days the won’s value fell against the U.S. dollars as negative news, including a feeble U.S. job market and falling manufacturing indexes in China and Europe, amplified anxiety over global economic stagnation.

Analysts said the strengthening of the U.S. dollar is likely to continue for the time being.

“The won’s depreciation against the U.S. dollar will likely continue as investors will be driven by the global economic uncertainties to expand their dollar purchases,” said an analyst at KTB Investment & Securities.

As the value of the euro fell, central banks in emerging markets including Korea started offloading their euro holdings.

In May alone, the euro fell 7 percent against the U.S. dollar. It was the sharpest fall since September 2011.

Central banks in the past increased their euro holdings while decreasing their dollar in a move to diversify their foreign reserves.

The U.S. greenback, which accounted for nearly 65 percent of Korea’s foreign reserves in 2007, shrunk to 60 percent as of 2011’s end.

According to a recent report in the Financial Times, the euro started to fall as the euro zone crisis intensified.

Central banks across the globe have increased their dollar reserves and reduced their euro assets. While dollars now account for more than 60 percent of the central banks’ foreign exchange pools, the euro has fallen from 40 percent to 25 percent.

The Korean central bank has piled up its foreign reserves aggressively after the financial crisis of the late 1990s, when its foreign reserves pool bottomed out.

Although there are divided opinions on the appropriate size of the foreign reserves, Korea’s foreign reserve pool exceeded $300 billion in June last year for the first time.

Last year the central bank added 40 tons of gold to its reserves, expanding its holdings to a total of 54.4 tons worth nearly $2.2 billion, 0.7 percent of the total foreign reserve assets. Analysts say the Korean government needs to increase its holdings of such safe assets.

By Lee Ho-jeong []

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