Two big Asian central banks learn to live with dollar's fall

Section:

China seeks direct talks with OPEC

From the Financial Times, London
Monday, December 4, 2006

http://news.yahoo.com/s/ft/20061204/bs_ft/fto120420061642266991

Asian central banks appear divided on how to respond to the falling US dollar. Several countries, including Thailand, South Korea, and Singapore, appear to have intervened to curb its decline against their currencies, while heavyweights Japan and China are taking a more benign approach.

"There is a degree of acceptance in Asia about the downward drift of the dollar as long as other currencies outside the region rise in value against it as well," said Adrian Foster, foreign exchange strategist at Dresdner Kleinwort in Singapore.

Some countries are more worried than others. South Korean financial officials are concerned about the rapid rise of the won, which on Monday hit a nine-year high against the dollar.

The South Korean currency has been among the fastest rising in the world, appreciating by nearly 10 percent against the greenback this year, which has affected profits at South Korean exporters such as Samsung Electronics and Hyundai Motor.

Traders say the Bank of Korea appeared to have intervened heavily last month to try to stem its ascent.

Thailand fears that its export competitiveness will be harmed by a rise of the baht, which has appreciated by 15 percent against the dollar this year.

The central bank has turned to administrative measures to ease upward pressure on the baht. In an attempt to deter short-term speculation on the currency, the Bank of Thailand on Monday announced that non-residents holding Thai treasury bills and government or central bank bonds without underlying businesses in the country must retain them for at least three months before selling them on.

Bigger economies appear better able to withstand the effects of a falling dollar. Japan, whose currency is considered undervalued against the dollar and euro, has not shown undue alarm at the strengthening of the yen against the dollar in the past few weeks.

Officials have suggested that they see no reason for the yen to weaken further given the health of the economy. Yen weakness has been blamed partly on the carry trade, in which investors borrow cheaply in yen to invest in higher-yielding assets, including US-denominated ones, abroad.

China has been in effect supporting the dollar for a number of years due to its purchases of US Treasuries and other financial instruments, which make up an estimated 70 percent of its $1,000bn foreign exchange reserves.

There has been no hint that the State Administration of Foreign Exchange (SAFE), which manages the money, has been buying dollars to support it or ease its decline.

But China's reserve holdings do give it an incentive to support a strong dollar. SAFE has became concerned about the negative impact on the dollar of suggestions that Beijing had been diversifying into other currencies.

One challenge facing Asian central bankers, however, are signs of inflation that could force them to raise interest rates and the value of their currencies as a result.

Mr. Foster said: "The central banks must balance the need to keep inflation under control without causing their currencies to appreciate sharply."

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Reporting by John Burton in Singapore, Anna Fifield in Seoul, Amy Kazmin in Bangkok, Richard McGregor in Beijing, and David Pilling in Tokyo.

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