Dollar Hoarding Fuels Won, Rupee, Real Drop on Losses (Update3)

By Kim Kyoungwha and Wes Goodman

Oct. 20 (Bloomberg) -- Exporters in emerging markets are hoarding dollars as losses on currency bets worsen the slump in the South Korean won, Brazilian real, Mexican peso and India's rupee.

South Korean phone parts maker KJ Pretech Co. resisted converting dollars to won after record swings in currency markets ruined its trading strategies. In Brazil, Aracruz Celulose SA, a pulp producer, Sadia SA, a poultry company and Grupo Votorantim, a cement maker, had $2.3 billion in losses on hedges intended to protect earnings from exchange-rate moves. India's biggest carmaker, Maruti Suzuki India Ltd., plans to wait for a weaker rupee before bringing profits home from outside the country.

Western Asset Management Co. and Union Investment, which manage more than $800 billion combined, are selling emerging- market currencies as the global economy slows and demand for dollars increases. Zurich-based UBS AG predicts the rupee will weaken 2.1 percent to a record low of 50 per dollar by March, adding to a 19 percent drop this year, while the won will depreciate 6 percent to 1,400, extending a 29 percent slump.

``This is all caught up in the broader trend for the global grab for dollars,'' said Edwin Gutierrez, a money manager who oversees $5.5 billion in debt in London at Aberdeen Asset Management, the Scottish fund company focused on emerging markets. ``Expect more weakness.''

Currency Slump

The won slumped 9.7 percent on Oct. 16, the most since the International Monetary Fund bailed the nation out in 1997. It has gained 4 percent in the past two days to 1,315 as the government mapped out a plan to support banks. India's rupee, which has slumped for 10 weeks, fell 0.2 percent today to 48.96 after the central bank cut its benchmark rate for the first time since 2004 today to support its economy.

The Brazilian real closed at 2.1190 on Oct. 17, bringing its 2008 drop to 16 percent. Mexico's peso ended the week at 12.88 per dollar, for a year-to-date decline of 15 percent.

Emerging markets tumbled after Lehman Brothers Holdings Inc. filed for bankruptcy, deepening a freeze in credit markets. Investors turned to the safest, dollar-denominated securities even though the U.S. economy is growing more slowly than those of developing nations and the Federal Reserve's 0.5 percent benchmark interest rate compares with 5 percent in South Korea, 8 percent in India and 13.75 percent in Brazil.

Three-month Treasury bill rates fell to 0.02 percent on Sept. 17, from 1.91 percent in August. The ICE futures exchange's Dollar Index, which tracks the greenback against the currencies of six U.S. trading partners, climbed 14 percent since June to 82.41, after falling 5.5 percent in the first half.

Rising Volatility

Rapid moves in exchange rates are perilous for exporters because they can't adjust their hedging strategies fast enough. The JPMorgan Emerging Market Volatility Index soared to a record 32.01 percent on Oct. 10 before ending the week at 25.63. The index never exceeded 15.66 until Lehman's bankruptcy, according to data compiled by Bloomberg.

``It doesn't matter what your fundamentals are,'' said Sergey Dergachev, an emerging-market money manager at Union Investment in Frankfurt, which has $233 billion in assets. ``Investors are trying to get rid of anything that is associated with market risk.''

Central banks and governments around the world are pumping unprecedented amounts of cash into the financial system to combat the credit crisis. The moves are starting to bring down money market interest rates, which may revive demand for higher- yielding assets such as emerging-market currencies.

The three-month London interbank offered rate for dollars fell every day last week, to 4.42 percent from 4.82 percent. The Dow Jones Industrial Average climbed 4.8 percent for its best weekly performance since 2003.

Debt Guarantees

South Korea's government yesterday announced it will grant a three-year guarantee for as much as $100 billion in debts used by the nation's lenders until June 30.

``The Korean won may rise a bit as it helps local banks secure dollars more easily,'' said Seo Chul Soo, a debt strategist in Seoul at Daewoo Securities Co., South Korea's third-biggest brokerage. ``Still, it can't solve the fundamental problem until the global financial market stabilizes.''

Brazilian losses on currency derivatives may reach 60 billion reais ($27 billion), said Paulo Vieira da Cunha, a former central bank director who is now a partner at New York- based hedge fund Tandem Global Partners. Korean companies may lose as much as 3 trillion won ($2.2 billion) on contracts that are only profitable when the currency stays in a range, said Kwon Jae Min, a credit analyst at Standard & Poor's in Hong Kong.

`At a Loss'

Taesan LCD Co., the Korean supplier of flat-screen parts to Samsung Electronics Co., failed on Sept. 16 because of losses on derivatives, financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates. KJ Pretech is losing $383,000 a month on similar trades.

``We are making up for currency losses with dollars from overseas sales,'' Lee Jeong Dae, head of the Hwaseong-based KJ Pretech's finance team, said in an Oct. 14 telephone interview. ``For now, it's manageable but we're at a loss how to get it through should export orders fall.''

Mumbai-based Sundaram Multi Pap Ltd., which makes school note books, is one of 12 companies that filed lawsuits against banks accusing them of hiding risks on the currency products they marketed. Citic Pacific Ltd., the Hong Kong arm of China's biggest state-owned investment company, said today it may lose as much as $2 billion from unauthorized currency bets. Mexico City-based Controladora Comercial Mexicana SAB, the country's third-largest supermarket chain, filed for bankruptcy last week because of losses linked to the peso's drop.

`Bad Trades'

``The unwinding of these bad trades is causing all types of problems,'' Tony Volpon, chief economist at Sao Paulo-based brokerage CM Capital Markets, wrote in a note to investors last week. The banks that sold the trades also ``hedged themselves,'' exposing them to similar funding calls, he wrote.

The won was Asia's best-performing currency in the four years to Oct. 31, 2007, soaring 31 percent to a decade high of 899.60 per dollar. That encouraged companies to buy contracts that lock in an exchange rate or profit from a drop in dollars.

South Korea's banks were the main sellers of the contracts. They borrowed dollars and converted them to won because they also wanted to fix a price for the U.S. currency to limit their exposure. That contributed to an almost tripling of the nation's external debt due in a year to $176 billion between the end of 2005 and June 30 this year.

There's a more than 50 percent chance Korean banks won't be able to find foreign funding, threatening their ability to repay short-term debt, S&P said in an Oct. 15 report.

Slowing Economies

Emerging market countries must still contend with a slowing global economy. The IMF's World Economic Outlook forecast this month that global growth will weaken to 3 percent in 2009, from 3.9 percent this year and 5 percent in 2007. That would mean a world recession under the fund's definition.

``India is still not going to get capital flows when the global liquidity conditions begin to ease,'' said Ajay Seth, chief general manager of finance at New Delhi-based Maruti Suzuki, which sells its Alto small car in Europe. The rupee will fall to 49 per dollar again ``very soon,'' he said.

Slowing exports and rising import costs prompted South Korea's central bank to forecast a $9 billion deficit in its current-account this year. Brazil is forecasting a $28.8 billion deficit in the broadest measure of trade.

``There's a funding problem in dollars worldwide,'' said Rajeev De Mello, head of Asian bonds in Singapore for Western Asset, which manages about $600 billion.

To contact the reporters on this story: Kim Kyoungwha in Beijing at kkim19@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net.

Last Updated: October 20, 2008 06:47 EDT

Developing Nation Debt Costs Soar as Belarus Joins IMF Requests

By Denis Maternovsky and Laura Cochrane

Oct. 23 (Bloomberg) -- Developing nations' borrowing costs jumped to the highest in six years and as Belarus joined governments seeking a bailout from the International Monetary Fund to help weather the credit crisis and slump in commodities.

The extra yield investors demand to own emerging-market government bonds instead of U.S. Treasuries rose 25 basis points to 8.27 percentage points, the most since November 2002, according to JPMorgan Chase & Co.'s EMBI+ index. The annual cost to protect Russia's bonds from default soared 1.3 percentage points to 10.8 percent of the debt insured, the highest in at least eight years, according to CMA Datavision.

``There is now no safe haven globally other than a deeply indebted U.S. government,'' said Jim Reid, head of fundamental credit strategy at Deutsche Bank AG in London. ``The events of the last few days are categorical evidence of the globalization of the credit crunch and its subsequent problems.''

Ex-Soviet Belarus followed Iceland, Pakistan, Hungary and Ukraine in requesting emergency loans as the global financial crisis limits its ability to borrow, the IMF said yesterday. Argentina's lawmakers are attempting to stop President Cristina Fernandez de Kirchner seizing pension funds from money managers, as the country risks defaulting for the second time this decade.

Emerging-market stocks, bonds and currencies are getting battered as the financial crisis that began with U.S. mortgages last year pushes the global economy toward a recession, crimping the demand for the commodities that sustain most developing nations' finances. The IMF forecast global growth will slow to 3 percent in 2009, from 3.9 percent this year, signaling a global recession.

Stocks in emerging markets have tumbled 59 percent this year, compared with 43 percent for developed countries, according to MSCI Indexes.

Government Bailouts

Belarus applied for a $2 billion loan and may also seek funds from central banks and commercial banks in other countries, news agency Interfax reported yesterday, citing the Belarusian central bank.

Speculation that Argentina's Fernandez intends to finance the government with privately managed retirement funds has roiled Latin America's markets. Argentine stocks had their biggest two-day drop since 1990 and dollar bond yields topped 30 percent on concern the takeover shows the government is struggling to avert a default. The last time the government seized savings was in 2001, before it reneged on $95 billion of debt and triggered a global selloff.

IMF bailout applicants Hungary and Ukraine led declines in emerging-market stocks to the lowest since 2005. The Budapest Stock Exchange index dropped for a sixth day, declining 3.43 percent to the lowest in five years. Ukraine's PFTS index fell 2.8 percent.

Vulnerable Nations

The MSCI Emerging Markets Index of shares fell 3.7 percent to 513.28 at 10.56 a.m. in London, extending the worst monthly decline in at least two decades.

``The threat from the economic slowdown will be greatest in small open economies, those with sizeable external imbalances, and countries with large banking sectors,'' said Ivailo Vesselinov, a senior economist at Dresdner Kleinwort in London. South Korea and Europe's Baltic and Balkan nations are ``particularly vulnerable,'' he said.

South Korea's won fell 3.4 percent to the lowest since 1998 on concern demand for the nation's exports is dwindling and the Kospi stock index slumped 7.5 percent. Romania's leu decreased 1.8 percent.

Default Swaps Surge

The cost to protect debt payments by 14 emerging-market governments from Argentina to Ukraine surged overnight by 3.2 percentage points to 9.9 percent, according to Deutsche Bank prices on the CDX Emerging Markets credit-default swap index.

``It isn't necessary for a major economy like Russia or Brazil to fall for there to be severe pressure across the emerging-market universe,'' said Vesselinov.

Credit-default swaps protect bondholders against default by paying the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. An increase indicates a deterioration in the perception of credit quality.

The yield on Russia's 30-year, 7.5 percent dollar notes increased 34 basis points to 11.32 percent, an all-time high.

Russia's international reserves, the world's third largest, fell $14.9 billion last week after the central bank sold currency to prop up the ruble.

To contact the reporter on this story: Denis Maternovsky in Moscow at dmaternovsky@bloomberg.net. Laura Cochrane in London at lcochrane3@bloomberg.net

Dollar Regains Haven Status as Deutsche Bank Says Buy (Update2)

By Agnes Lovasz

Oct. 27 (Bloomberg) -- The dollar is reasserting its status as the world's reserve currency as investors seek a haven from plunging emerging-market stocks and bonds.

The ICE futures exchange's U.S. Dollar Index, which tracks the greenback against six trading partners, rose last week the most in more than four decades as the dollar soared to a two- year high versus the euro and reached its strongest in six years against the U.K. pound. A global grab for dollars has pushed the index up 22 percent since July 15 to the highest since April 2006.

The sell-off in emerging markets may ``set the stage'' for bigger gains, says Barclays Capital in London. Demand for the safety of Treasuries is turning the foreign-exchange market into a ``one-way street,'' according to Frankfurt-based Deutsche Bank AG, the world's biggest currency trader. BNP Paribas SA, the most-accurate forecaster in a 2007 Bloomberg survey, says the dollar may return to parity with the euro in coming months.

The global crisis ``is manifesting into dollar strength,'' said Hans-Guenter Redeker, the London-based global head of currency strategy at BNP Paribas.

Last week the Dollar Index surged 4.9 percent to 86.44, as the greenback climbed 5.9 percent to $1.2623 per euro and strengthened 8 percent to $1.5897 to the pound. Its biggest gain came against the Australia dollar, rising 11.6 percent, followed by a 10.7 percent increase versus the New Zealand dollar and an 8.8 percent advance versus the South Africa rand.

Crisis Intensifies

Investors, banks and even companies are scooping up dollars to repay loans denominated in the currency as the 14-month-long credit crisis intensifies.

Banks have extended about $2.5 trillion in foreign-currency loans to emerging markets, according to Barclays, which cited data compiled by the Bank for International Settlements in Basel, Switzerland. Some 70 percent of the claims on developing nations in Asia mature in less than one year, while the amount for emerging European countries is 43 percent.

``Deleveraging, which has been going on in developed countries for at least 12 months, has just begun in the developing world,'' a Barclays team led by London-based David Woo wrote in an Oct. 23 report. ``The increasing difficulty facing developing countries to roll over their foreign-currency loans may set the stage for even greater strengthening of the dollar.''

Emerging Markets Tumble

Yields on emerging-market dollar-denominated bonds climbed to 8.62 percentage points more than Treasuries last week as investors dumped the securities, up from 3 percentage points at the start of September, according to the JPMorgan Chase & Co. EMBI+ Index. The MSCI Emerging Markets Index fell to a five-year low as stocks from Brazil to Korea tumbled on speculation developing nations will find it harder to service foreign debt.

Demand for dollars can be seen in the Treasury market, where the Federal Reserve's holdings of U.S. government debt on behalf of foreign central banks and institutions have increased by $60.1 billion this month to $1.56 trillion. That's the biggest monthly gain on record.

``Combined with rapid dollar repatriation and U.S. banks having grown increasingly reluctant to lend dollars to banks abroad, this has generated a sustained demand for dollars,'' a Deutsche Bank team led by Bilal Hafeez, global head of currency strategy in London, wrote in an Oct. 24 report.

Dollar Questioned

When the euro was rallying 38 percent from November 2005 through July, economists said the dollar was in danger of losing its primacy. The euro's share of global central bank reserves rose to 27 percent at the end of March from 17 percent in 2000, according to the International Monetary Fund in Washington. The dollar's share fell to 62.5 percent from 72.1 percent.

As recently as April, the National Bureau of Economic Research, the group that determines when recessions begin and end, said the euro may become the world's reserve currency in the next seven years. Jeffrey Garten, a professor of international trade at the Yale School of Management in New Haven, Connecticut, and undersecretary for commerce and international trade in the Clinton administration, said in November the world was undergoing a ``rebalancing'' of economic power.

The prospect of falling U.S. interest rates may offset some of the demand for the dollar. The odds on the Fed halving its target rate for overnight bank loans to 0.75 percent on Oct. 29 rose to 26 percent last week, futures on the Chicago Board of Trade showed. The chances were zero a week earlier.

Dollar `Pullback'

The U.S. already has the lowest rates of any Group of Seven industrialized nation except Japan, where the key rate is 0.5 percent. That means even dollar bulls expect the gains may slow before picking up again later in the year or in 2009.

``We will look for a pullback,'' said Meg Browne, vice president of foreign-exchange research at Brown Brothers Harriman & Co. in New York. Still, ``we haven't ended this period of unwinding'' and over the next two to three years ``the dollar will strengthen,'' she said.

Another obstacle for the dollar is the flood of debt the U.S. will sell to finance the budget deficit and bank bailouts. Gross issuance of Treasury coupon securities will rise to about $1.15 trillion in the 2009 fiscal year from $724 billion last year, according to Credit Suisse Securities USA LLC, one of the 17 primary dealers of U.S. government securities obligated to bid at Treasury auctions.

``The true test whether the dollar really is a safe haven has yet to come,'' Deutsche Bank's London-based currency strategist Henrik Gullberg wrote in an Oct. 24 report to clients.

Commodity Currencies

A survey dated Oct. 27 of 30 fund managers overseeing $1.45 trillion by Jersey City, New Jersey-based Ried Thunberg & Co. found that 59 percent expect the dollar to strengthen against the euro over the next three months, down from 71 percent last week.

As the dollar gains, the currencies of commodity-exporting nations including Australia and Canada are likely to suffer most, according to Citigroup Inc. The Australian currency has dropped 23 percent versus the greenback in the past month, while Canada's dollar has slumped 19 percent as commodities tumbled.

``Dollar repatriation overtakes coordinated policy action at the heart of the radar,'' analysts led by London-based Tom Fitzpatrick, global head of currency strategy at Citigroup, wrote in a report Oct. 24. ``Capitulation on long positions in foreign assets is gaining pace. Risk reduction should continue to dominate. Commodity currencies should suffer the most.''

Morgan Stanley recommends currencies in countries with low interest rates, such as Japan and the U.S., where investors sought loans to purchase assets in countries with higher rates.

Foreign exchange ``market dynamics suggest the frictions are not over yet,'' Sophia Drossos, a currency strategist at Morgan Stanley in New York, said in an Oct. 22 report to clients. ``Flows appear consistent with continued delivering and we expect this trend has further to run.''

To contact the reporter on this story: Agnes Lovasz in London at alovasz@bloomberg.net

Last Updated: October 27, 2008 07:18 EDT

Iceland Central Bank Raises Key Interest Rate to 18% (Update2)

By Tasneem Brogger and Helga Kristin Einarsdottir

Oct. 28 (Bloomberg) -- Iceland's central bank unexpectedly raised the benchmark interest rate to 18 percent, the highest in at least seven years, after the island reached an aid agreement with the International Monetary Fund.

Policy makers raised the key rate by 6 percentage points, the Reykjavik-based bank said in a statement on its Web site today, taking the rate to the highest since the bank began targeting inflation in 2001. It will publish the reasons for today's move at 11 a.m. local time.

The central bank is raising rates as Iceland, the first western nation to seek aid from the IMF since the U.K. in 1976, faces a prolonged contraction, coupled with possible hyperinflation and rising joblessness. The economy will shrink as much as 10 percent next year, the IMF forecasts. Iceland will receive about $2.1 billion in aid from the Washington-based fund, according to a deal struck on Oct. 24.

This is ``a first step toward opening their currency market and is probably one of the conditions attached to the agreement struck with the IMF,'' said Bjarke Roed-Frederiksen, a Copenhagen- based economist at Nordea Bank AB, the biggest Nordic lender.

Today's increase in the key rate comes after the central bank on Oct. 15 cut it by 3.5 percentage points from 15.5 percent. That move indicated policy makers were focusing on growth and abandoning their target of stabilizing inflation, which may soar as high as 75 percent in coming months, according to Lars Christensen, chief analyst at Danske Bank A/S in Copenhagen.

Daily Auctions

The central bank has been holding daily auctions since the currency's collapse earlier this month with local market makers setting the rate at about 150 kronur per euro. According to Roed- Frederiksen, further rate increases can't be ruled out if policy makers want to strengthen the krona once international traders are granted access to the market.

Iceland's financial regulator took control of Kaupthing Bank hf, Landsbanki Islands hf and Glitnir Bank hf earlier this month, after they couldn't secure short-term funding. That precipitated the collapse of the currency. The central bank on Oct. 7 attempted to peg the krona only to abandon the measure a day later citing ``insufficient support.''

History shows that attempts to save currencies from plunges by raising interest rates are prone to failure. The U.K. on Sept. 16, 1992, boosted its benchmark rate by 5 percentage points in two moves to 15 percent in a doomed effort to keep the pound in a European exchange-rate system. Britain gave up the attempt the same day and canceled the second rate rise; the pound lost 22 percent against the dollar in the final two months of the year.

During the 1997-98 Asian financial crisis, the International Monetary Fund advocated high rates to help restore confidence in sliding currencies. Central banks from Indonesia and Thailand to South Korea and Singapore lifted borrowing costs. South Korea took its main rate to 30 percent in December 1997.

The strategy failed to prevent exchange-rate collapses across the region. South Korea's won lost 47 percent against the dollar in 1997, the Thai baht fell 45 percent and Indonesia's rupiah plummeted 56 percent.

To contact the reporters on this story: Tasneem Brogger in Copenhagen at tbrogger@bloomberg.net;

Last Updated: October 28, 2008 06:03 EDT