Governments from South Korea to Brazil are stepping up attempts to control their currencies as investors pour a record amount of money into emerging markets.
Regulators in Seoul will start an audit of lenders handling foreign-currency derivatives on Oct. 19 to curb volatility caused by capital flows, the finance ministry said today. Brazil doubled a tax it charges foreigners on investments in fixed-income securities to 4 percent yesterday. The yen fell the most in three weeks after the Bank of Japan cut benchmark interest rates and pledged 5 trillion yen ($60 billion) to buy bonds and other assets, having sold $25 billion worth of its own currency last month in the first intervention since 2004.
Policy makers are trying to limit inflows after the Korean won climbed 8 percent in the past three months to the strongest since May and Brazil’s real gained 4.7 percent to a two-year high. Investors have plowed a record $49.4 billion into emerging-market stock funds this year and $39.5 billion into bond funds, EPFR Global data show. Pacific Investment Management Co., which manages more than $1 trillion, in April raised its holdings of developing-nation bonds to the most since 2008.
“The question remains to what extent can countries with floating exchange rates and open capital accounts prevent real appreciation in a world of massive capital flows,” said Kevin Gallagher, a professor at Boston University who has written reports on the issue for the United Nations. “The evidence shows that it can be done, at least in the short term.”
World Bank President Robert Zoellick said yesterday he sees tensions arising from currency devaluations as nations seek to buoy their economies.
Protect the Won
The won dropped 0.7 percent to 1,130.58 per dollar, after yesterday reaching 1122.30 per dollar, the strongest level since May 5. The Bank of Korea and the Financial Supervisory Service audit will ensure banks are following curbs on currency derivatives that were announced in June and take effect over two years, starting Oct. 9.
As many as eight banks operating in South Korea, only one of which is domestic, are in breach of the caps and the value of contracts is about $5.4 billion more than the level allowed under the new rules, according to Doh Bo Eun, head of the foreign-exchange coordination team at the financial regulator. The won strengthened 5.1 percent in September, the biggest monthly advance in a year.
“Gains in the won were a bit fast,” Doh, who is involved in the audit, said in an interview in Seoul today. “We want to see the market stabilize and the measures are expected to curb volatility.”
Brazil’s real fell 0.5 percent to 1.6979 per dollar yesterday, after touching a two-year high of 1.6735 on Oct. 1. Finance Minister Guido Mantega warned Sept. 27 of a “currency war,” saying the government will buy “excess dollars” in the market to limit the real’s appreciation. The government will double to 4 percent the tax it charges on foreigners to invest in the nation’s bonds, first introduced in October 2009. Foreigners held a record $9.2 billion of local debt in August.
Brazil offers real interest rates of 8 percent to 9 percent, said Bill Gross, who manages the world’s biggest bond fund at Newport Beach, California-based Pimco. The won is representative of “strong emerging-market currencies to stand in contrast to the U.S. dollar,” he said in an interview today on Bloomberg Television’s “Surveillance Midday” with Tom Keene.
The Bank of Japan today cut its benchmark rate to a range of zero to 0.1 percent, a move Governor Masaaki Shirakawa described as “comprehensive monetary easing.” It last cut the target rate to 0.1 percent from 0.3 percent in December 2008.
“This shows a commitment by the Japanese authorities to do whatever they can at their disposal to not allow the yen to appreciate anymore and provide liquidity,” said Nader Naeimi, a Sydney-based strategist at AMP Capital Investors Ltd., which manages $85 billion.
The yen was little changed at 83.39 per dollar today, 3 percent stronger than its weakest level after the nation intervened on Sept. 15. Finance Minister Yoshihiko Noda told reporters in Tokyo today he is prepared to explain to Group of Seven counterparts Japan’s reasons for intervening.
Japan sold 2.12 trillion yen in the month through Sept. 28, after the yen strengthened to a 15-year high against the dollar, threatening the nation’s export-led recovery. The central bank may sell yen again at anytime, said Joseph Capurso, a foreign- exchange strategist at Commonwealth Bank of Australia in Sydney.
The Taiwan dollar strengthened yesterday beyond NT$31 for the first time since August 2008, before erasing most of its gains in late trading because of suspected intervention. The central bank may have sold NT$20 billion ($642 million) or more to curb the currency’s rise, the Economic Daily News reported today, without saying where it got the information.
India’s rupee has appreciated 4.4 percent in the past month, Asia’s best performance, and central bank Deputy Governor Subir Gokarn said today action would be taken if capital flows prove disruptive. Overseas investors plowed $6.4 billion into the nation’s shares in September and made net purchases of another $440 million on Oct. 1, exchange data show.
The Bank of Thailand is still studying measures to help manage the appreciation of the baht, which reached a 13-year high of 30.08 per dollar yesterday, Director Wongwatoo Potirat told reporters in Bangkok today. Policy makers in Indonesia, Malaysia and the Philippines have also in the past two months indicated they will intervene to curb volatility.