Forex Blog: Currency Trading News & Analysis.

March 4th 2005

South Korea: To sell or Not to Sell USD

South Korea’s behavior with regard to its USD reserves has been nothing short of erratic. A few weeks ago, rumors that South Korea was planning to ‘diversify’ a large portion of its reserves (mostly into Euros), began to circulate.  Economists and traders, alike, feared the worst. Would the rest of Asia, which collectively holds over $2 trillion in USD reserves, follow suit?

Later in the week, South Korea publicly announced that it had no intention of diversifying its reserves. What was responsible for the sudden about-face?  One must look no further than the dollar’s recent decline. Asian central banks are in a bind- they are damned if they do and they are even more damned if they don’t. If they sell USD en masse, they will probably send the dollar spiraling downward, as the market would not be big enough to support the surplus of USD. However, if they maintain their reserves in the form of USD, they run the risk of a further devaluation of reserves. A slight deprecation in the dollar would significantly stunt the unbelievable growth occurring in the region. Bloomberg Reports:

The current system is looking more and more like a huge pyramid scheme. As long as Asian central banks stick together and buy dollar-denominated securities, things are fine. Once they start selling, virtually everyone loses — central banks experience capital losses and economies become less competitive.

Read More: Is Kafka Running Korea’s Currency Policy?

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Posted by Adam Kritzer | in Exotic Currencies | No Comments »

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