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South Korea's Reserves Dive on Intervention Talk

South Korea's foreign reserves posted their second-biggest loss in a decade in May, data showed on Tuesday, after dealers reported authorities dumped some $2.5 billion during the month to prop up the local currency.

Korea, Korean Flag
CNBC.com
Korea, Korean Flag

Foreign exchange reserves fell $2.28 billion to $258.2 billion by the end of May from $260.5 billion a month before, the Bank of Korea said in a statement, citing its dollar supply to the swaps market as one reason for the downturn.

It marks the second-biggest monthly loss in foreign exchange reserves since the 1997 Asian financial crisis after a drop of more than $3 billion in April due to the repayment of government bonds at maturity, the central bank said.

South Korea had the world's sixth-largest foreign reserves as of the end of April.

As is the case with most countries, finance ministry and central bank officials have declined to confirm the reported interventions in the local spot currency market, which took place on at least two occasions, on May 21 and 27.

The finance ministry has the final say in foreign exchange policy, although it is the central bank that actually buys or sells dollars in the local market for intervention.

The won has lost almost 10 percent against the dollar this year, and more than 15 percent against the yen as its decline against the U.S. unit bucked the Japanese currency's rise.

Tackling Inflation

The figures come after government data showed on Monday consumer inflation shot up to a seven-year high in May, putting the central bank under pressure to raise interest rates while resisting government demands for a cut to lift the economy.

Vice Finance Minister Choi Joong-kyung said on Tuesday, "the government will double effort in all areas to achieve price stability". Choi said during the early part of a planned meeting of senior government officials to discuss ways to fight inflation.

This helped the Korean won rise as high as 1,016.9 per dollar, the strongest since May 7, after Choi's comments suggested the government would allow the won to rise.

The annual rate of inflation, standing at 4.9 percent in May, is far below the double-digit rates seen in some other Asian countries but more than double the 2.3 percent that South Korea recorded a year earlier.

The Bank of Korea has held the benchmark interest rate steady at 5.0 percent for nine consecutive months after raising it by a combined 1.75 percentage points in seven stages since October 2005. It next reviews rates on June 12.