Feb 22, 2005

South Korea spooks the Currency Markets

A while back, I referred to South Korea as the weakest member of the dollar managing cartel in a comment on Brad Setser's site. If you are wondering why South Korea's hint at a policy change may be a big deal I highly recommend reading his entire post. He and Nouriel Roubini have written some great stuff describing the gamesmanship involved in trying to fix currency levels.

In a nutshell we have been watching for 6 months as smaller counties diversify away from the dollar while China and Japan try to maintain the status quo. As of Q4 S. Korea was also trying to keep its currency static to the dollar. If the comments today are not retracted and are followed by action then S. Korea becomes the biggest small country to abandon the dollar. That could conceivably speed up the selling or increase the share of the U.S. borrowing needs that must be funded by Japan and China.

It is best to think about what is going on in terms of game theory with China and Japan sitting in separate rooms and deciding if they can still support the dollar while doing so means increasing the risk of loss.

1 comment:

  1. I have added a number of blogs to my blogroll (see those that are in bold) that post on the USD and currencies in general. I have a feeling that we will all be wanting more information about the effects of a falling dollar on us personally over the coming years. I think that Gold will be considerably higher and in the 70's the price of Gold was higher than the Dow Jones Average. I believe the two will cross again and we all should have some dollars in this area for insurance. I do.
    Mover Mike