Finance and Economic

South Korea authorities will work to halt “excessive'' moves in the won, Asia's second-biggest declining currency this year, including using foreign-exchange reserves to stem its drop.

The won climbed 1.1 percent to 1,038.30 per dollar at 9:48 a.m. in Seoul after the finance ministry and Bank of Korea issued statements today addressing their concern over the currency's more than 10 percent decline in 2008. “We'll take stern action if necessary when the market imbalance becomes excessive,'' the ministry said in Gwacheon.

“It is urgent to restore credibility in the market,'' Ahn Byung Chan, director-general of the central bank's international bureau, told reporters. “Perceptions in the market are not in line with the government's intention.''

Asia's economies were crippled by a currency crisis a decade ago when Thailand's devaluation of the baht prompted investors to pull money from the region. Countries including Indonesia, Thailand and South Korea spent most of their foreign reserves to prop up their exchange rates and had to borrow more than $100 billion from the International Monetary Fund.

“Authorities are concerned about the foreign-exchange market moving in only one direction too much,'' the finance ministry said in today's statement.

South Korea's won 10.2 percent drop this year is second only to an 11.7 percent slump in the Thai baht, according to Bloomberg data. A declining won has exacerbated the nation's inflation pressures by making imports more expensive.

Consumer prices in South Korea surged 5.5 percent in June from a year earlier, the biggest increase in a decade and exceeding the central bank's target for an eighth straight month.

`Top Priority'

“The government has set top priority on stabilizing inflation and we will have to manage the foreign-exchange market to meet that goal,'' said Choi Jong Ku, head of the ministry's international finance bureau pay day advance. “We will use foreign-exchange reserves again if necessary'' to curb the won's decline, he said.

Asia's policy makers have accumulated foreign-exchange reserves since the 1997 crisis. South Korea had $258 billion in reserves at the end of June, the sixth-highest in the world, trailing only China, Japan, Russia, India and Taiwan.

Financial authorities bought $7 billion of won since the end of May to help support the currency, the JoongAng Ilbo newspaper reported on July 1.

“Policy makers are trying to suppress a rise in import prices by intervening in the foreign-exchange market,'' said Chun Chong Woo, an economist at SC First Bank Korea Ltd. in Seoul.

No Crisis

Bank of Korea Deputy Governor Rhee Gwang-Ju, in a July 2 interview, said this year's decline in Asian currencies doesn't signal a repeat of the region's 1997 crisis.

Those comments were echoed by Asian Development Bank President Haruhiko Kuroda. “I don't think currencies in the region would be under significant pressure in the coming months or years,'' he said in Tokyo last week.

Finance ministers from 13 Asian nations, including South Korea, Japan and China, agreed in May to create a pool of at least $80 billion in foreign-exchange reserves to be tapped by nations in case they need to protect their currencies. That was an expansion of the so-called Chiang Mai Initiative under which pairs of nations would lend each other money at favorable terms if help is needed to support their exchange rates.

“I don't think any of them would request IMF or Chiang Mai Initiative supports,'' Kuroda said on July 4.

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The European Central Bank’s interest rate rise sends a signal that it is serious about combating inflation, policymakers said as they staged a public relations offensive to justify Thursday’s increase.

A day after raising rates to a seven-year high of 4.25 percent, policymakers around the 15-nation region denied that the increase would choke economic growth and said soaring inflation was a bigger danger to consumers.

Luxembourg’s Yves Mersch said the ECB could do little to influence soaring international commodity prices but it could take steps to head off euro zone wage pressures. “We are sending a signal today which shows that we are determined to act against home-made inflation,” he told the Luxemburger Wort newspaper.

Inflation rose to a record 4 percent in June and policymakers have vowed to prevent these high rates from pushing up inflation expectations, prompting workers to demand big pay rises and firms to jack up their prices faxless cash advance.

Expectations calculated from yields on some inflation-linked bonds are at record highs and ECB Executive Board member Jose Manuel Gonzalez-Paramo said it was vital to keep these in check.

“If these expectations become permanent in the system, we are lost,” he told a seminar in San Sebastian, Spain.

The ECB raised rates by 25 basis points but President Jean-Claude Trichet said the Governing Council had no bias in favor of further rate moves, damping bets on another increase soon.

Other policymakers including Italy’s Mario Draghi, Germany’s Axel Weber, Cyprus’s Athanasios Orphanides and Austria’s Klaus Liebscher, gave little away about the future path of rates, but backed Trichet’s message of rising inflation worries. 

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Australian retail sales rose in May at the fastest pace in six months, sending the currency higher on speculation the central bank will boost borrowing costs again this year.

Sales climbed 0.7 percent from April, when they fell a revised 0.1 percent, the Bureau of Statistics said in Sydney today. The increase beat the median estimate of 24 economists surveyed by Bloomberg News for a 0.1 percent gain.

Spending has increased on food, recreational goods, cosmetics and jewelry, suggesting households are weathering 12- year high interest rates and record gasoline prices. Tax cuts introduced yesterday that boost average incomes by A$20 ($19) a week may drive spending in coming months, increasing pressure on central bank Governor Glenn Stevens to cool the economy further.

“We're calling another rate hike this year, probably in November,'' said Matthew Johnson, a senior economist at ICAP Australia Ltd. in Sydney. “If consumers can increase discretionary spending when fuel prices are high, then they will most probably spend the tax cuts.''

The Australian dollar climbed to 95.85 U.S. cents at 12:33 p.m. in Sydney from 95.47 cents before the figures were released. The two-year government bond yield rose 7 basis points, or 0.07 percentage point, to 6.93 percent.

Spending at recreational goods retailers gained 2.2 percent in May, while food sales increased 1 percent, the report showed.

Rate Increases

Australia's central bank has been trying to curb consumer spending, which accounts for about 60 percent of the economy, to cool inflation that has accelerated above its target range of between 2 percent and 3 percent.

Stevens and his board left the benchmark interest rate at 7.25 percent yesterday, saying the economy will moderate this year. The bank increased rates in March, February, November and August.

Last month, Stevens signaled that the bank is prepared to boost borrowing costs again if consumer and business spending rebounds.

Today's report suggests hiring by mining companies such as BHP Billiton Ltd., which is expanding to meet demand from China for iron ore and coal, is shoring up spending. The jobless rate was 4.3 percent in May, close to the lowest in more than three decades internet payday loans.

Export Boom

The central bank expects Australia's terms of trade, a measure of income from overseas sales, to surge 20 percent this year. The increase “will add substantially to national income and ability to spend,'' Stevens said yesterday.

Also, some A$33 billion ($32 billion) in income-tax cuts over four years took effect from yesterday.

Households also appear to be weathering this year's surge in the price of crude oil, which hit a record $143.67 a barrel this week.

“So much for higher petrol prices affecting households discretionary spending,'' said Katie Dean, a senior economist at Australia & New Zealand Banking Group Ltd. in Melbourne. “Today's data raises doubts over the Reserve Bank's apparent view that household spending was slowing abruptly.''

The surge in retail spending means an August increase in the central bank's cash rate target can't be ruled out, Dean added.

Conflicting Reports

Investors increased bets on the size of future increases in borrowing costs after today's report. Stevens will boost the benchmark rate by 25 basis points in the next 12 months, according to a Credit Suisse Group index based on trading in interest-rate swaps. Yesterday, they forecast 19 basis points of gains.

Still, some economic reports signal household spending will slow in coming months. Consumer confidence slumped to the lowest level in almost 16 years in June, and a separate release today showed home-building approvals fell 6.5 percent May, the fourth decline in the first five months of this year.

Just Group Ltd., Australia's largest specialty clothing retailer, cut earnings forecasts today because of a “further weakening in consumer sentiment.''

“Anecdotes about spending remain very weak,'' said Brian Redican, a senior economist at Macquarie Group Ltd. in Sydney. “For that reason, we think policy makers will view today's retail sales report with a large dose of salt.''

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The Federal Reserve left its key short-term interest rate unchanged Wednesday at 2%, marking the first time in the nine months that it did not cut rates.

The central bank also raised alarms about inflation. But experts said it is still unclear what the Fed will do with interest rates at its next meeting Aug. 5 and for the remainder of the year.

The widely expected move Wednesday comes at a time when many economists and consumers are focusing on the rising price of oil and other commodities. The central bank has a mandate to fight inflation, which it typically does by raising rates.

In fact, Dallas Federal Reserve Bank president Richard Fisher voted for a rate hike at the meeting. The other nine members of the Fed’s policy-making committee were in favor of no change to interest rates.

In a statement, the Fed said it still expects inflation pressures to ease later this year, but cautioned about the upward pressure on prices caused by rising oil and other commodity prices.

In light of continued increases in those prices, the Fed said "upside risks to inflation and inflation expectations have increased."

Some Fed watchers said the Fed had no choice but to talk tougher about inflation.

"The Fed is talking hawkish because it’s all they can do," said Rich Yamarone, director of economic research at Argus Research. "It can’t cut rates due to the rising inflation environment and it can’t raise rates due to the frailty of the economy and financial markets."

The central bank’s statement said that the rate cuts it has already made should help lead to improved economic growth ahead, although it cautioned the economy is still weak due to tight credit, a weak housing market and high energy prices.

The fed funds rate is an overnight bank lending rate used as a benchmark to set the rates that consumers pay for many types of loans as well as the prime rate used to peg the rates paid on certain business loans.

The central bank slashed its federal funds rate seven times since last September in an effort to keep the economy from weakening significantly in the wake of the housing slowdown and credit crisis rattling Wall Street and Main Street since last summer.

Despite Fisher’s push for an immediate rate hike, most economists are expecting the Fed to stay on hold until at least the end of the year, if not into 2009. And some economists say it’s possible the Fed’s next move might still be to cut rates further, not raise rates.

"I don’t think there’s anything preordained because I don’t believe they know what their next move will be," said David Kelly, economist and chief market strategist for JPMorgan Funds.

Kelly said he believes the most significant part of the statement is the Fed referring to high energy prices as a drag on the economy, as well as an inflation threat guaranteed payday loan. The Fed said that "the rise in energy prices are likely to weigh on economic growth over the next few quarters." It did not say that in April.

"They clearly see the double-edged sword. That makes them less likely to raise rates than if they saw oil as an inflation threat only," he said.

Another reason the Fed might not raise rates soon is because of the weak jobs market.

Mark Vitner, senior economist with Wachovia, said the Fed has limited ability to fight inflation pressures posed by oil and commodities such as corn and wheat since their prices are largely set by global supply and demand.

But unemployment has been on the rise and wages have not been keeping up with prices. Most economists say increases in personal income, not the price of commodities, are the biggest cause for concern regarding inflation.

"They can’t print oil, they can’t make it stop raining in the Midwest," said Vitner. "The part of inflation the Fed can actually control is performing fairly well. We don’t see any evidence of a wage-price spiral taking hold."

Lyle Gramley, a former Fed governor now with the Stanford Group, a Washington research firm, agrees that the uncertainty about growth and inflation risks make it difficult to predict what the Fed will do next.

"We just don’t know how things are going to work out," he said. "The essence of wisdom in this case is not to commit yourself to a course of action."

But other economists say the Fed is caught between hoping for inflation pressures to retreat and hoping for the economy to show some improvement, despite recent reports on consumer confidence, jobs and the housing market showing further weakness.

"The Fed seems to be focused on a strengthening economy. But assuming does not make it so," said Bob Brusca of FAO Economics. "Inflation risks will diminish only when you hike rates." 

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