Dollar rises as Japan, South Korea say they won’t sell the currency

Taizo Hirose

Wednesday, Feb. 23, 2005 | 9:23 a.m.

The dollar rose in Asia after Japan's Ministry of Finance and South Korea's central bank said they have no plans to reduce U.S. currency holdings.

The announcements by Japan, which has the world's largest foreign-exchange reserves totaling $841 billion, and Korea, the fourth-largest, came a day after the Bank of Korea sparked the biggest decline in the dollar against the euro in more than six months by saying it planned to change the composition of its holdings.

"Korean and Japanese pledges not to sell dollar assets are supporting the U.S. currency," said Xinyi Lu, chief strategist in Tokyo at UFJ Bank Ltd., part of Japan's fourth-biggest lender.

Against the dollar, the yen fell to 104.68 at 2:55 p.m. in Tokyo from 104.04 late yesterday in New York, according to EBS, an electronic foreign-exchange dealing system. The decline in Japan's currency began after a government report today showed exports grew at the slowest pace in more than a year.

The yen is down 2.8 percent from a five-year high reached Jan. 17 on concern the Japanese economy will struggle to recover from recession. The dollar fell the most in four months against the yen and lost 1.5 percent versus the euro yesterday after a Korean central bank report to legislators Feb. 18 showed it plans to diversify holdings and buy Australian and Canadian assets.

The dollar was as strong as $1.3230 per euro and traded at $1.3242, from $1.3259 yesterday, when it fell the most in more than six months. The yen weakened to 138.57 per euro from 137.95, a decline of 0.5 percent.

"The dollar's recovery may be swift," said Takeshi Iba, head of foreign exchange in Tokyo at Calyon, the securities unit of Credit Agricole SA. "Yesterday it looked as though everybody was selling the dollar and suddenly there are buyers all around."

Masatsugu Asakawa, director of the foreign exchange markets division at the Ministry of Finance, said Japan has no plans to diversify its reserves.

Some traders also bought the dollar after the Bank of Korea said it plans to diversify investment targets to non-government papers, rather than sell dollars, said Sabrina Jacobs, a currency strategist in Singapore at Dresdner Kleinwort Wasserstein. Today's statement didn't mention other currencies.

The statement is "positive for the dollar," said Jacobs. "The dollar is a dominant currency and will remain" so. It may gain to 104.75 yen and $1.32 per euro today, she said.

The central bank's press release today followed the won's appreciation to more than 1,000 against the dollar for the first time since November 1997. "The Bank of Korea will not change the portfolio of currencies in its reserves due to short-term market factors," the bank said.

Korea has the fourth-largest reserves, holdings of foreign currency in a nation's central bank, in the world behind Japan, China and Taiwan.

"At this stage, we don't have such plans" to diversify reserves, Asakawa told Bloomberg News at the ministry in Tokyo.

Japan's currency fell the most in a week against the euro after the Ministry of Finance said export growth in January slowed to 3.2 percent from a year ago, compared with December's 8.8 percent gain. The slowdown suggests overseas demand may not be strong enough to pull the nation's economy out of recession.

"Exports are already the last resort for Japan's recovery," said Takashi Toyahara, a currency trader in Tokyo at Nomura Securities Co., Japan's biggest brokerage. "That's undermining confidence on the yen."

Japan unexpectedly slipped into recession last year as exports faltered and consumer spending shrank, a government report showed on Feb. 16. Net exports, or the difference between exports and imports, subtracted from gross domestic production in the fourth quarter.

Imports rose 11.6 percent and the trade surplus shrank to 200.8 billion yen ($1.92 billion), the Ministry of Finance report today showed. The median forecast in a Bloomberg survey of economists was for a 509 billion yen surplus.

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