Asian Central Banks May Have Sold Dollars

Strong upward pressure on the dollar emanating from the European debt crisis and the tensions on the Korean peninsula apparently was countered by intervention from several Asian central banks.

At one point the dollar was nearly 5.25% stronger against the Korean won on the day, bringing its advance to more than 13% since May 14. The central bank is rumored to have sold $3.5-$4 bln. The dollar now is about 3% higher on the day.

The Philippine central bank also is believed to have intervened, but its effectiveness was less clear. The dollar gapped higher and it is still bid on the highs of the day. Indonesia's central bank is also thought to have intervened, though the amounts were thought modest the central bank was thought to be persistent.

Foreign investors are liquidating Asian equities at a fairly strong pace. This month, for example, has seen foreign investors liquidate more than 60% of the Indonesian shares bought during the Jan-April period. Foreign investors have unwound half of this year's purchases of Korean shares so far this month and about a quarter of the purchases of Taiwanese shares. Going into this month, foreigners had purchased about $1.2 bln of Thai shares. They have sold $1.4 bln this month.

Risk aversion, concerns about world growth, and of course the heightened military tensions on the Korean peninsula are all contributing factors. Central banks in the region have amassed a large war chest of reserves. Reserves need to be thought of in the context of not only the traditional approach via a vis imports, but also in terms of short-term debt obligations coming due and in terms of the amount of hot money that can be reversed.

Meanwhile, the macro-economic considerations that had been favoring increased rate hikes in the region as both domestic and foreign demand was fueling price pressures, are clearly on hold now.