Asian Currencies Retreat After Interventions Falter

By Patricia Lui and Wes Goodman

Sept. 18 (Bloomberg) -- Asian central banks are giving up efforts to stop their currencies falling after an investor exodus overwhelmed the largest intervention in a decade.

Policy makers are reducing their support for South Korean won and the Philippine Peso, allowing faster depreciation across Asia, according to HSBC Holdings Plc estimates and data compiled by Bloomberg. That's a change from two months ago, when the Bank of Korea sold a record $20.9 billion and the Reserve Bank of India reduced foreign exchange reserves by $7.9 billion, London- based HSBC said.

The shift prompted ING Investment Management and Daiwa SB Investments Ltd. to bet on declines even after the won slumped 19 percent this year and the rupee slid 16 percent. A slowdown in the region's economies is causing investors to flee and putting Asian stocks on course for their worst year since 1990. Foreigners sold $32 billion more shares than they bought in South Korea and $8.6 billion in India.

``The willingness to intervene and burn reserves to maintain a specific level versus the dollar is a lot less,'' said Joel Kim, head of Asian debt in Hong Kong for ING Investment, which oversees $12 billion in assets and is part of the largest Dutch financial services company. ``We've been selling across the board.''

Shifting Strategy

Central bankers say they will accept weaker currencies. South Korea's Vice Finance Minister Bae Kook Hwan said on Sept. 11 that authorities will only buy or sell to influence exchange rates when won moves are ``volatile.'' Two months ago, when the won was 7 percent stronger, the Finance Ministry pledged ``stern action'' to prevent excessive price swings.

The Bank of Thailand isn't planning to use its more than $100 billion in reserves to hold back the baht's slide, Bank of Thailand Governor Tarisa Watanagase said today in Bangkok. ``We will just move with the market,'' Tarisa said in a Bloomberg Television interview when asked about the baht.

Reserve Bank of India Governor Duvvuri Subbarao said on Sept. 9 in Mumbai that the central bank will be ``flexible'' and focus on managing price swings.

South Korea's reserves slid 8 percent in five months to $243.2 billion, heading for the first annual decline in a decade. Last month, they dropped 1.8 percent, less than half the pace in August, a sign the central bank was spending less to prop up the won. India's cash reserves dropped 7.4 percent this quarter to $280 billion and Thailand's fell 5 percent to $101 billion.

Crisis of 1997

The last time South Korea's reserves declined this fast was during the Asian financial crisis of 1997, when the won dropped 50 percent and 15,000 companies went bankrupt. Seoul-based Samsung Group and Daewoo Group asked employees to sell gold rings, necklaces and coins to help the country raise foreign currency.

The slower decline in reserves ``appears to reflect decisions to intervene less, rather than reflecting less pressure on currencies,'' Daniel Hui, a strategist at HSBC in Hong Kong, wrote in a Sept 12 report. Europe's biggest bank expects the won will weaken to 1,185 within a year, from 1,116 yesterday.

Emerging-market currencies including the Russian ruble and the Brazilian real are also tumbling as the failure of banks including New York-based Lehman Brothers Holdings Inc. boosts demand for the safest assets.

The South Korean won fell 3.4 percent to 1,154.10 against the dollar as of 12:49 p.m. in London. The rupee slid 0.3 percent to 46.49 per dollar, close to a two-year low. The baht was at 34.03, near the lowest in a year, while the Philippine peso closed at 46.96.

Surprised Strategists

This year's declines surprised strategists, who predicted in January that Asian economies would withstand a U.S. economic slowdown. At that time, they forecast the won would end 2008 at 890 per dollar, the rupee at 38 and the baht at 31.38, according to Bloomberg News surveys of economists.

The won will climb to 1,090 in 12 months because South Korea's economy is strong enough for the Bank of Korea to raise interest rates, said Kwon Goohoon, an economist in Seoul at Goldman Sachs Group Inc. The economy will expand 4.3 percent this year and 4.6 percent in 2009, according to the median estimate of 9 strategists by Bloomberg.

``We continue to believe that the recent spike to around 1,150 is an overshoot,'' he said.

To avoid a repeat of the 1997 crisis, nations in the region have built up more than $4 trillion in reserves and set up an $80 billion pool among 13 Asian countries that can be used to protect currencies. South Korea has the sixth-biggest store of reserves in the world.

`Extremely Large' Reserves

``Korea's reserves are extremely large and there's no immediate danger'' that they'll be depleted, said Phillip Blackwood, head of emerging-markets in Aabenraa at Sydbank A/S, Denmark's third-largest bank, who oversees $5 billion of bonds.

Even so, he predicts the won will weaken 5 percent or more by year-end because speculation that growth in Asia and the U.S. would decouple is ``well and truly dead.''

Asia's economies will slow as demand from the U.S. and Europe weakens, New York-based Merrill Lynch & Co. said in a Sept. 12 report. The region will expand 7.7 percent this year, less than an earlier forecast of 7.9 percent, Merrill said.

South Korea's $970 billion economy grew 4.8 percent in the second quarter from the same period in 2007, the slowest pace in more than a year. Household spending fell for the first time in four years as rising living costs prompted consumers to save.

Barclays Plc, the third-biggest currency trader, predicts the won will fall to 1,200 by year-end, the baht to 37 and the rupiah to 9,450 and is now revising those forecasts lower.

`Selling Asia'

``There might be an exodus for a prolonged period, which is not a very nice scenario,'' said Wee-Ming Ting, head of Asian fixed income in Singapore at Pictet Asset Management Ltd., part of Switzerland's largest privately held bank for the wealthy. Pictet, which overseas $109 billion, has been ``selling Asia for a few months,'' he said.

The credit-market slump is complicating efforts by central banks to defend their currencies. South Korea canceled a $1 billion sale of bonds to finance intervention on Sept. 12, as Lehman's share collapse drove up funding costs.

Some of Asia's ``humongous'' reserves are in bonds of Washington-based Fannie Mae and Freddie Mac of McLean, Virginia, the mortgage finance companies taken over by the U.S. government this month, said Frank Engels, a senior money manager in Frankfurt for Union Investment Privatfonds GmbH, which oversees about $250 billion. That makes the funds less accessible to support currencies, he said.

The won will drop to 1,150 by year-end, said Kei Katayama, who oversees $1.6 billion of non-yen debt as leader of the foreign fixed-income group in Tokyo at Daiwa, part of Japan's second-biggest investment bank.

``Defending currencies won't help,'' he said. ``The U.S. economy led the current world recession. Now it's spreading to Europe, the U.K., and Asia.''

To contact the reporters on this story: Patricia Lui in Singapore at plui4@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net.