South Korea sells dollars after biggest fall in reserves

South Korea's foreign exchange reserves suffered their biggest-ever monthly drop in July, when the authorities reportedly spent some $15 billion propping up the won, using the currency as their main tool to fight inflation. Traders said the authorities sold an estimated $300 million on Monday to further support the won, demonstrating a preference for a firmer currency despite the sharp fall in reserves.
Asia's fourth-largest economy is expected to keep bolstering the currency to tackle imported inflation, but intervention is unlikely to be as strong as in July due to weaker oil prices and a slowing economy, analysts said. "As oil prices fell from July, the burden of inflation on the government has been eased," said Kim Jae-eun, an economist at Hana Daetoo Securities.
"The authorities will not reverse the market trend of a weaker won although they will slow down the speed of the unit's fall." Oil prices hovered just below $126 a barrel on Monday, much lower than the record high of $147.27 in July.
Monday's intervention was small compared with money market operations in July, when the authorities spent an estimated $5 billion on one day itself to support the ailing local currency. Before local financial markets opened on Monday, the Bank of Korea said the country's foreign reserves fell $10.58 billion to $247.52 billion by the end of July from a month earlier, citing "efforts aimed at stabilising the foreign exchange market".
It was the biggest monthly decline since the central bank started compiling foreign reserves figures in 1971. The sharp fall in reserves heightened concerns South Korea could be confronted with an economic crisis similar to the 1997-98 Asian financial crisis, and raised expectations the authorities might intervene less, losing their grip on the won. But senior officials at two of the world's top credit rating agencies told Reuters that there was no problem with the country's external payment capability despite the drop.
NO CHANGE IN FX POLICY A senior foreign exchange official also told Reuters the authorities saw no reason to change their policy of defending the local currency as one of the main tools to contain inflation.