Taiwan and Japan move to allay dollar switch fears

Japan and Taiwan yesterday sought to allay fears that their central banks might switch their reserves out of dollars following comments by the Bank of Korea (BoK) on Tuesday that unsettled markets.

The Bank of Korea moved to temper the won's sudden surge to seven-year highs, going back on earlier statements that it had been converting some of its $200 billion (€154 billion) of foreign exchange reserves held in dollars into other currencies.

South Korea's central bank seemed to be caught offguard by the violent market reaction, with major currencies around the world rising sharply against the dollar.

The dollar yesterday recouped some of its losses against the won, the euro and the yen when the BoK issued a statement saying it had no intention to let "short-term market factors" influence its reserves portfolio.

"[ The Bank of Korea] means to diversify its foreign reserves into non-state bonds but does not mean to sell and convert dollar-denominated US currency reserves into other international currencies," it said.

This was at odds with a report the BoK submitted to the national assembly saying that it planned to diversify its holdings into a variety of currencies as well as increasing investments in high-yielding non-government debt, such as papers issued by financial institutions and asset-backed securities.

The report triggered on Tuesday the dollar's biggest fall since October and yesterday it briefly breached the significant Won1,000 mark to hit Won998.1.

A BoK official in charge of foreign exchange reserves played down the report. "This is just a routine operation where we adjust our portfolio according to changing foreign exchange rates and interest rates, in order to seek higher profitability," he said.

But an Asian foreign exchange strategist said the BoK was "trying to control the fallout". "It was the most spontaneous Korean won move since the [ 1997 Asian financial] crisis," he said.

The won partially recovered to close at Won1,003.8 in local trading yesterday.

Japan said yesterday it had no intention of diversifying its huge foreign currency reserves into euros and denied that it had come under any pressure from Washington to stick with dollar assets. "As far as Japan is concerned, we have a consistent policy for the time being; we have no intention of diversifying," said Mr Mastatsugu Asakawa, director of the foreign exchange division at the finance ministry.

"I did not get any call from my counterpart in the [ US] Treasury," Mr Asakawa said. "I don't know if my Korean colleague was contacted," he said, alluding to the apparent switch yesterday of South Korea's stance on diversification away from the dollar. The dollar's sharp fall against the yen on Tuesday was reversed yesterday.