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South Korea Posts Record Drop in July FX Reserves

Reuters
Sunday, 3 Aug 2008 | 9:10 PM ET

South Korean foreign exchange reserves fell by a record amount in July, central bank data
showed on Monday, as dealers reported the authorities have sold about $15 billion during the month to prop up the won.

The Bank of Korea said in a statement the country's foreign reserves fell $10.58 billion to $247.52 billion by the end of July from $258.10 billion a month earlier, citing "efforts aimed at stabilizing the foreign exchange market".

It was the biggest monthly decline since the central bank started compiling foreign reserves figures in 1971.

The central bank did not provide the exact number of dollars it and the Finance Ministry sold during the month as they tried to prevent the sliding won from exacerbating high inflation, which has been led by imported commodities.

"We intervened in the market last month to correct mounting speculative trades, but the market usually overstates the intervention size," a Bank of Korea official, who declined to be
named, said by telephone without giving the exact value.

But it was very unusual for the South Korean central bank, which also attributed some of the decline to losses in dollar terms from non-dollar assets, to admit currency intervention.

The two top foreign exchange authorities warned in a rare joint statement on July 7 that they would make a draw on the country's foreign reserves if needed to stop the weakening won
from inflating the costs of importing key materials.

Dealers reported the authorities as having sold an estimated $15 billion during July, helping lift the won by almost 4 percent against the dollar for the month. The currency had fallen 11 percent for the January-June period.

The figures come after statistics agency data showed on Friday annual consumer-price inflation picked up to a near 10-year high of 5.9 percent in July, outpacing market expectations for 5.7 percent, from 5.5 percent in June.

South Korean authorities are worried the accelerating inflation would cut down on the disposable income of consumers at a time when a slump in domestic demand is already expected to dent growth in Asia's fourth-largest economy this year.

South Korea's foreign exchange reserves fell $14.7 billion, or 5.6 percent, during the first seven months of this year.

The Bank of Korea said 84.2 percent of the reserves were invested in securities, followed by 15.6 percent deposited at financial institutions.

As of the end of June, South Korea's foreign exchange reserves ranked sixth in the world after China, Japan, Russia, India and Taiwan, the central bank said.