Feb. 22 (Bloomberg) -- The dollar fell the most in more than a week against the euro and dropped versus the yen, Korean won and the Canadian and Australian currencies after the Bank of Korea said it plans to diversify its reserves.

South Korea's central bank, which has a total $200 billion in reserves, said in a report to a parliamentary committee on Feb. 18 that it will increase investments in assets denominated in currencies such as the Australian and Canadian dollars. Korean investors, including the central bank, are the fifth-biggest foreign holders of U.S. Treasuries.

``Support for the dollar is quickly disappearing,'' said Kenichiro Ikezawa, who manages $1 billion in overseas debt at Daiwa SB Investments in Tokyo. ``This Korean story is having quite an impact because it feeds into suspicion that others are also seeking to cut their exposure to the dollar.''

The dollar fell to $1.3176 per euro at 9:08 a.m. in London, from $1.3068 late yesterday in Toronto, according to EBS, an electronic foreign-exchange dealing system. It dropped to 104.31 yen, from 105.54. U.S. markets were closed yesterday for a national holiday. The dollar may weaken to $1.32 per euro today, Ikezawa said. The U.S. currency is up 3.8 percent from a record low of $1.3666 versus the euro on Dec. 30.

``The market will now be looking to other central banks and what they will be doing, including the European central banks and Middle Eastern banks,'' said Mansoor Mohi-Uddin, head of currency strategy at UBS AG in London. ``The euro could go to $1.32 today,'' he said.

South Korea has the world's fourth-largest reserves, behind Japan, China and Taiwan, according to data compiled by Bloomberg.

`Still Have Faith'

Korean investors, including the Bank of Korea, held $69 billion in Treasuries as of December last year, the most recent figures available, according to the Treasury Department. Japan, the largest, has $711.8 billion. The Bank of Korea report was given to some legislators on Feb. 18 and reported by Reuters yesterday.

``The likes of Thailand, Taiwan and the smaller, medium- sized central banks may follow suit,'' in diversifying their reserves, said Stephen Jen, global head of currency research at Morgan Stanley in London. Japan and China, the two largest holders of Treasuries, probably won't shift out of the dollar, he said. They ``cannot diversify while the dollar is under pressure.''

China has kept its currency pegged to the dollar since 1999. Japan sold a record amount of yen in the first quarter of last year to help stem its advance. The dollar in 2004 fell for the third straight year against the yen and the euro.

``In the long run I still have faith in the U.S. dollar,'' said Jen, who raised his forecasts for the currency on Feb. 10. Jen predicts the dollar will trade at $1.24 per euro and 96 yen at year-end, up from previous estimates of $1.32 and 92 yen.

`Sheer Size'

``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 report, distributed to members of the parliament's finance and economy committee in advance of a debate scheduled for Feb. 24, also said the bank will expand investments into assets with lower credit ratings than the South Korean government.

Russia

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.

U.S. Treasuries were the second-worst performing major government market in the world last year, returning 3.5 percent to investors, according to Merrill Lynch & Co. indexes. Only Japanese bonds, which returned 1.3 percent, did worse among the world's largest government bond markets.

``To have a high proportion in U.S. assets is far from ideal so it's good to diversify,'' said Mark Austin, head of currency strategy at HSBC Holdings Plc in London. HSBC forecasts the dollar will fall to a record $1.40 per euro and to 98 yen, the weakest in a decade, by the end of the year.

``South Korea wants to start picking up higher yields so that includes moves in to the Australian currency and sterling, and they'll be buying government bonds,'' said Austin.

Japanese Economy

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 trade 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 22, 2005 04:10 EST