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October 10, 2010

ECONOMY
OCTOBER 8, 2010, 6:20 A.M. ET
Asian Forex Reserves Climb
By DAVID ROMAN

SINGAPORE—Asia’s foreign-exchange reserves climbed 3.1% to a record in September as the region’s central banks bought dollars aggressively to temper the rise in their own currencies.

In addition to the intervention spree, a surge in the euro and the price of gold–two other common reserve components–helped boost the dollar value of the Asian stockpiles.

Reserves reported by 11 key Asian central banks, excluding China’s, rose to $2.963 trillion at the end of September from $2.875 trillion at the end of August, as compiled by Dow Jones Newswires.

China, by far the world’s largest reserves holder, reports its totals quarterly. It had $2.454 trillion at the end of June and will release its next estimate later this month.

Asia’s intervention campaign, led by Beijing, has prompted concerns as exporting countries scoop up dollars in an effort to rein in their own currencies. The U.S. and others have said this distorts markets and impedes a needed shift away from a global economy dependent on Asia lending money to America to buy the region’s goods.

China intervenes regularly to keep the tightly managed yuan from rising quickly. Japan sold a record 2 trillion yen ($24.23 billion at current rates) Sept. 15 in its first intervention in more than six years, and local traders have reported dollar-buying in various degrees from central banks in South Korea, Taiwan, Indonesia, Thailand, Malaysia, the Philippines and Singapore.

Many of the central banks sell some of these dollars for other reserve currencies–such as the euro, yen and Australian dollar–as they seek to diversify their holdings away from the wilting greenback. This helps boost the other currencies and further inflates the reserves in dollar terms.

The euro rose 7.5% in September, while gold jumped 11.9%.

“Emerging countries, especially in Asia, are looking to deploy reserves in a different manner,” said Vishnu Varathan, economist with Capital Economics.

“You see more interest in currencies like the Australian dollar, and even Asian currencies like the Korean won, where for example China can buy Korean bonds and then Korea can buy Chinese bonds,” he said. “It’s a natural progression, given than they trade more and more with each other.”

The Bank of Thailand is looking to invest some of its reserves in yuan bonds issued by the Chinese government, Asst. Gov. Suchada Kirakul said last week. This comes after Japan unveiled large purchases of yen securities by Beijing in recent months.

Asian reserves may in fact be rising even faster than the data suggest. Analysts say some central banks temporarily understate their holdings by keeping them in forward contracts that are reported months later as they mature.

The Bank of Korea, with the smallest reported September rise in the group, at 1.5%, may be doing this, Nomura analysts reckon. It also likely transferred large amounts of dollars to the country’s sovereign wealth fund in September. Both factors may mean Korea’s September reserves totaled close to $300 billion, compared with the $289.8 billion officially stated, Nomura said.

Asia’s reserves are likely to keep rising as capital inflows remain strong in the world’s fastest-growing region. Foreign investors remain attracted by relatively high policy rates in countries like Thailand and Indonesia, and strong rallies in local stock markets.

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