Korea Won't Diversify FX Reserves-Yonhap
Sun Apr 10, 2005 2:04 AM EST
By Oh Jung-hwa and Yoo Choonsik
SEOUL (Reuters) - South Korea's central bank will not seek to diversify currencies in its massive foreign exchange reserves away from the dollar because that would push the won higher, Yonhap news agency quoted the bank's chief as saying on Sunday.
Park Seung, Governor of the Bank of Korea, was also quoted as saying while visiting Japan that the won's rise was too fast and should not gain further.
He said he planned to discuss issues related to the foreign exchange reserves when he meets his Japanese and Chinese counterparts in Seoul on May 27, according to Yonhap.
"The exchange rate should not go down further," Park was quoted as telling reporters in Okinawa, where the Inter-American Development Bank (IADB) was holding its annual conference.
"The policy of seeking diversification in foreign reserves can push the exchange rate down further."
A currency dealer in Seoul said Park's remarks represented a dilemma facing South Korean foreign exchange authorities -- that they cannot afford to expand foreign reserves further amid domestic criticism about the costs of carrying reserves.
"I don't think it really means they are abandoning the diversification effort but the central bank wants to show the determination of authorities to slow the won's rise," said Park Yong-il, senior FX trader at DBS Bank branch in Seoul.
COST OF HOLDING RESERVES
South Korea, Asia's third-largest economy, held reserves of $205.45 billion at the end of March, the fourth-largest holdings in the world. The reserves rose 26 percent over a year before, or some $42 billion, which dealers said mostly came from the central bank's direct intervention in the local currency market.
The rising cost of accumulating and holding reserves has emerged as a headache for Asia's central banks, which together hold more than $2.45 trillion of such assets.
The won has risen only about 2 percent so far this year against the dollar but it followed a 15 percent gain in 2004. Its rise was also in contrast to a drop of about 5 percent in Japan's yen against the dollar this year.
As a result, the won's value against the yen rose 7 percent this year to its highest level since the 1997-1998 Asian financial crisis.
The finance ministry and central bank recently began to emphasize the need to encourage investment abroad by South Koreans to lessen the upward pressure on the won from continuing dollar inflows from exporters and equity investors.
The ministry plans to unveil before the end of June a package of steps to ease regulations on investment by South Koreans in real estate and securities abroad.
Park's remarks came after the central bank said in late February it would diversify its reserves toward higher yielding currencies and bonds, sending the U.S. dollar tumbling against major currencies.
Later the Bank of Korea played down the remarks, contained in its policy statement to the country's parliament, and said they were just referring to long-held policies and did not mean to indicate it would sell dollars in favor of other currencies.
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