Sinking dollar overwhelms central banks in Brazil, Korea and Russia
November 15, 2009
By Oliver Biggadike and Matthew Brown
South Korea Deputy Minister of Finance Shin Je Yoon said on Friday that the country would leave the level of its currency to market forces after adding about $63 billion (R468bn) to its foreign exchange reserves this year to slow the appreciation of the won.
Chilean finance minister Andres Velasco said the same day that legislators approved an increase in local debt sales to finance spending, a move that would allow the government to keep more of its dollar-based savings overseas and slow the peso's rally.
The governments are amassing record foreign-exchange reserves as they direct central banks to buy dollars in an attempt to stem the greenback's slide and keep their currencies from appreciating too fast and making their exports too expensive.
Half of the 10-best performers in the currency market this year came from developing markets, gaining at least 14 percent on average, according to data compiled by Bloomberg.
"It looked for a while like the Bank of Korea was trying to defend 1 200, but it looks like they've given up and are just trying to slow the advance," said Collin Crownover, the head of currency management in London at State Street Global Advisors, which has $1.7 trillion under management.
The won, after falling 44 percent against the dollar in March from its 10-year high of 899.69 to the dollar in October 2007, is now headed for its biggest annual rally since a 15 percent gain in 2004. It traded at 1 160.32 on Friday, up 8.6 percent since the end of December.
Brazil's real is up 1.6 percent this month, even after imposing a tax on foreign stock last month and bond investments and increasing foreign reserves by $9.5 billion in October in an effort to curb the currency's appreciation. The real has risen 33 percent this year.
"We have to be careful that our exchange rate doesn't appreciate too much as to deindustrialise the country," Marcos Verissimo, the chief of staff at Brazil's state development bank known as BNDES, said on Thursday at a conference in Sao Paulo. "The capital goods industry has suffered tremendously."
Russia's Bank Rossii increased its foreign reserves by 15 percent since March 13, as it sold rubles in an attempt to cap the currency's gain. Even so, the surge in commodities prices this year means Russia's steps to fight a stronger ruble may "not be productive", the International Monetary Fund (IMF) said.
Energy, including oil and natural gas, accounted for 69.5 percent of exports to countries outside the former Soviet Union and the Baltic states in the first nine months, according the Federal Customs Service.
"There are changes in the underlying factors that call for a more appreciated exchange rate," Odd Per Brekk, the Washington-based IMF's senior representative in Russia, told reporters.
Intercontinental Exchange's US dollar index, which tracks the currency's performance against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, touched 74.774 on Wednesday, the lowest level since August last year, and has fallen 16 percent from the high this year of 89.624 on March 4 to 75.550 on Friday.
Much of the greenback's decline stems from investors borrowing funds in the US, where the target benchmark interest rate is between zero and 0.25 percent. They then invest the proceeds in countries with higher rates and faster growing economies.
World Bank president Robert Zoellick said the recent fall of the dollar was a response to the currency's earlier rise and to market dynamics, giving the US few near-term options for changing its course.
The value of the dollar depended on confidence in dollar-denominated assets and also to the movements of other currencies, Zoellick said to Asia-Pacific business leaders in Singapore on Friday. - Bloomberg
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