Feb. 22 (Bloomberg) -- The dollar fell almost a cent against the euro and dropped versus the yen on a report that South Korea's central bank will diversify its currency reserves.

The central bank, which has $200 billion in reserves, will ``diversify the currencies in which it invests,'' Reuters said yesterday, citing a Bank of Korea spokesman in a parliamentary report. Byun Jai Yung, head of the bank's planning department, told Bloomberg in a telephone interview that he can't comment.

``People are taking the Bank of Korea story a bit more seriously and there's some talk other central banks are backing away as well,'' said David Mozina, a currency strategist at ABN Amro Holding NV in Sydney. The dollar's decline triggered some automatic orders to sell the currency, he said.

The dollar fell against the euro to $1.3148 at 1:42 p.m. in Tokyo from $1.3068 late yesterday in Toronto, according to EBS, an electronic foreign-exchange dealing system. The dollar fell to 104.91 yen from 105.54. U.S. markets were closed yesterday for a national holiday.

``Korea is one the largest holders of foreign exchange reserves in the world, which means they will be able to buy more non-dollar currencies,'' said Greg Gibbs, a Sydney-based senior currency strategist at RBC Capital Markets. South Korea has the world's fourth-largest reserves behind Japan, China and Taiwan, according to data compiled by Bloomberg.

The yen's gain accelerated as it breached 105.40 per dollar and 137.65 per euro, where pre-set orders to buy the Japanese currency were clustered, said Tsutomu Soma, a currency and derivatives trader in Tokyo at Okasan Securities Co.

`Sheer Size'

The dollar's slide against the euro quickened after $1.31, where investors placed similar orders, said Jake Moore, a strategist at Barclays Capital in Tokyo.

``The sheer size of Korea's reserves makes it unignorable,'' said Tetsu Aikawa, currency sales manager in Tokyo at UFJ Bank Ltd., a unit of Japan's fourth-largest lender. ``That revives the memory in people's minds how badly the dollar was sold when Russia said it was diversifying.'' The U.S. currency may weaken to $1.32 per euro today, he said.

The dollar fell to a then record against the euro on Nov. 23 after Russia's central bank said it may increase the amount of euros in its reserves. The dollar fell as much as half a percent against the euro on Jan. 24, after a survey sponsored by Royal Bank of Scotland Plc showed central banks boosted euro holdings.

Almost 70 percent of the 56 central banks surveyed said they increased exposure to the 12-nation currency, according to the survey conducted by Central Banking Publications Ltd., a London- based publisher, between September and December 2004. Fifty-two percent said they reduced exposure to the dollar.

`Getting Better'

The yen's advance began earlier today on speculation Japan's economy will recover from its fourth recession since 1991. The U.S. currency also weakened versus the euro.

Traders may renew bets on the yen after it retreated 3 percent from a five-year high of 101.69 on Jan. 17, said Sabrina Jacobs, a currency strategist at Dresdner Kleinwort Wasserstein. Japan's trade surplus widened for a second month in January, a government report tomorrow may show.

``Investors are increasingly realizing that the second-half recession in 2004 was the low point in Japan and that it's most likely getting better,'' said Singapore-based Jacobs. ``That's helping the yen.''

Japan's surplus probably grew to 508.5 billion yen ($4.84 billion) from a year earlier, according to the median forecast of 24 economists surveyed by Bloomberg. The Ministry of Finance is scheduled to release the report at 8:50 a.m. tomorrow in Tokyo.

``We're looking for some signs of improvement in Japanese exports,'' said Tomoko Fujii, a Tokyo-based foreign-exchange strategist at Citigroup Inc. A rising surplus ``will place upward pressure on the yen.''

Finance Minister Sadakazu Tanigaki said on Feb. 20 Japan's economy will ``improve in the latter half of this year.'' Growth shrank at an annualized pace of 0.5 percent in the three months ended Dec. 31, a third straight quarterly contraction.

To contact the reporter on this story: Taizo Hirose in Tokyo at Hirose2@bloomberg.net.

Last Updated: February 21, 2005 23:54 EST