South Korea won't diversify out of dollar

[HenryTo]

Somewhat related to the whole U.S. dollar/Chinese Renminbi issue:
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Finmin says S. Korea won't diversify out of dollar
NEW YORK, May 9 (Reuters) - South Korea does not plan to diversify foreign exchange reserves out of dollars, said South Korea's Finance Minister Han Duck-soo on Monday.

South Korea's plans to invest some of the country's foreign exchange reserves through a new management agency, the Korea Investment Corp. Those funds will be used to buy highly liquid U.S. assets, including Treasuries and other securities, he told reporters at the Council on Foreign Relations in New York.

South Korea is "not going from the U.S. continent into Europe or things like that," Han Duck-soo said.

"Our central bank (South Korea's central bank) made it clear. That kind of policy, I should say, is not actually on the agenda," he said. "No diversification in that sense of the word," he added.

"A little degree of diversification in U.S. assets, but not among the currencies," was how he referred to the K.I.C.'s anticipated investment policy.

South Korea has accumulated huge foreign reserves as it has battled to keep the won -- about 3.7 percent firmer to the greenback this year -- competitive.

Reserves reached $206.4 billion by the end of April, making them the world's fourth largest.

Han said Korea, China and Japan all agree the dollar remains the "key currency through which we can maintain our values of foreign exchange reserves," which currently stand at a combined $1.6 trillion.

These three countries will play the "adequate" role in maintaining global financial stability expected of them, given the size of their reserves and degree to which they finance the U.S. current account deficit.

Han said the K.I.C. will start up on July 1 with an initial $20 billion warchest, built from $17 billion of foreign exchange reserves and $3 billion of government funds.

FX SHIFTS HAVE TO BE "DRAMATIC"

In the currency market, traders' sensitivity to foreign exchange reserves diversification risks has soared recently as speculation has intensified that China is about to overhaul the 11-year old regime pegging the yuan to the dollar.

The South Korean won recently traded at its strongest level since late 1997, with the U.S. dollar falling below 1,000 won. Dollar/won has hovered around that psychological threshold for the past two weeks, amid rising speculation that China might announce a move soon.

A stronger yuan could trigger a rise in currencies across Asia, economists say, as regional competitors to China become more tolerant of export-sapping domestic currency strength.

Han said it was not appropriate to comment on reform of China's currency regime, a subject he says is up to Beijing to deal with.

But as far as closely controlled Asian exchange rates are concerned -- particularly China's yuan -- Han suggested Asian currency appreciation would have to be substantial to have any meaningful impact on global trade and savings imbalances.

"For this kind of change in the exchange rates to be effective in affecting the real economic situation, the range of the change should be rather dramatic," Han said. "Just a mere percentage or so change may not be enough."

It's in everyone's interest that the record U.S. current account deficit be brought under control smoothly "without too much burden on the American people," Han said.

He welcomed the White House's pledge to cut the budget deficit in half over the course of the current administration, something that would go a long way to reducing concerns about global financial imbalances.

"We hope that those programs will be implemented to the full extent so that worries about global imbalances will be much more reduced," Han said.

How financial markets rate the U.S. government's chances of achieving this goal, however, is more open to debate. "We will have to wait and see," Han said.