Central banks resort to capital controls

Central banks from Bogota to Mumbai are imposing foreign-exchange curbs to take control of their soaring currencies from traders dumping the dollar.

In Colombia, international investors buying stocks and bonds must leave a 40 per cent deposit at Banco de la Republica for six months.

The Reserve Bank of India created a bureaucratic thicket to curb speculation by foreign money managers. The Bank of Korea is investigating trading of currency forward contracts to limit gains in the won, now at a 10-year high.

Instead of using currency reserves or interest rates to influence foreign exchange markets, central banks and finance ministries are setting up obstacles to keep the falling dollar from threatening company profits and economic growth.

The US currency slumped 10 per cent this year against its biggest trading partners, the steepest decline since 2003, while Treasury Secretary Henry Paulson has reiterated that the US supports a "strong'' dollar.

"Central banks are struggling to find new ways to intervene against their currencies and some of the proposals simply can't work,'' said Mirza Baig, an analyst in Singapore at Deutsche Bank AG, the world's biggest currency trader. Some plans are "truly bizarre,'' he wrote in a report.

The US hasn't attempted to stop the decline as the worst housing slump in 16 years forced the Federal Reserve to lower interest rates. The dollar has weakened 19 per cent against the Canadian currency this year to a record 90.58 cents, and fell 18 per cent versus Brazil's real.

The euro strengthened 1.2 per cent last week and reached an all-time high of $1.4752 on November 9. It traded at $1.4560 today as of 11:22 a.m. in London. The yen rose 3.6 per cent last week, and it touched 109.61 per dollar today, the highest since May 2006.

'More Violent Correction'
An index tracking the dollar against seven major trading partners dropped to 71.11 on November 2, the lowest ever, a week after the Fed reduced its target rate for overnight loans between banks by a quarter-percentage point to an 18-month low of 4.5 per cent.

Stephen Jen, head of currency research at Morgan Stanley in London, said on November 2 that the dollar's slide threatens to turn into a "more violent correction'' that may require joint intervention by the US, European Union and Japan. The dollar will trade at $1.51 per euro by year-end, Jen said on November 8.

The extent of the dollar's slump reminds some traders of 1973, when former President Richard Nixon's Treasury Secretary John Connally abandoned the Gold standard while the US was in recession and inflation exceeded 10 per cent. The dollar lost 40 per cent against the yen in the next five years.

Since 2002, the US currency has fallen 40 per cent against the Canadian dollar, 33 per cent versus the euro and weakened 24 per cent compared with the British pound.

Exports Increase
There's little evidence this year's decline is hurting the economy. Gross domestic product increased 3.9 per cent in the third quarter, the highest since March 2006, the Commerce Department said on October 31. The annual inflation rate was 2.8 per cent in September, the Labor Department reported on October 17.

The US trade deficit unexpectedly narrowed 0.6 per cent in September to $56.5 billion, as exports increased 1.1 per cent, the Commerce Department said November 9.

The pain is being felt elsewhere. US sales for Hyundai Motor Co., South Korea's third-biggest exporter, may decline for the first time in nine years with the won the "No. 1 obstacle,'' Vice Chairman Kim Dong Jin said in an interview last month. The won's 3 per cent gain in the past year helped send Hyundai's shares down 9 per cent.

Profit Squeeze
Infosys Technologies , India's second-largest software exporter, cut its full-year earnings forecast on October 11, blaming the rupee's 13 per cent rise. The shares fell 24 per cent this year.