Central banks are scrambling to prop up local currencies as investors flock to safe havens like the dollar and yen.The Bloomberg-JPMorgan Asia dollar index fell just over 2% this week. The South Korean won fell 4.7%, after hitting a 13-month low yesterday.
South Korea has been the most aggressive in its defence of the won. Its central bank, on behalf of the finance ministry, sold between $7.5 billion – $10 billion of U.S. dollars from Monday to Thursday, to prop up the won , according to The Wall Street Journal. On Friday alone, it was said to have sold about $4 billion, and was at 1,164.90 won for a dollar. The Seoul Composite closed down 5.73%.
In a bid to drive demand for the won, the central bank also reportedly asked conglomerates to exchange their foreign-currency earnings for won.
A weak won is a good and a bad thing for the country. Exports account for about 50% of South Korea’s GDP, and a weaker won would help keep its exports cheap. But, it would drive up the cost of its imports and during a slowdown in the global economy investors would likely pull their funds out of an export-dependent country.
Central banks around the world are taking action
After the Indian rupee made gains, it was reported that the Reserve Bank of India (RBI) India’s central bank intervened to sell dollars, despite the deputy governor’s comments that it had made no such move. A falling rupee would make the inflation problem much worse, and analysts believe the Reserve Bank of India (RBI) should intervene.
Meanwhile, Bank Indonesia bought 1.74 trillion rupiahs worth of long-dated government bonds (worth around $196 million) and intervened in the forex market yesterday to support the rupiah. Perry Warjiyo, director of economic research at the central bank told Bloomberg, the central bank would stay in the market to boost confidence in the rupiah.
Central banks know they can’t rely on this quick fix as depleted foreign currency reserves would create another host of problems, like limiting their ability to pay off foreign debt.
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