It’s a bit frightening that a policy change in South Korea, whose dollar denominated assets surely pale in comparison to China and Japan’s, can cause this (WSJ, subscription required):
NEW YORK — The dollar plunged, posting its largest one-day loss versus the euro since August and dropping to a seven-year low versus the South Korean won, as reports of diversification of official reserves again spooked the market.
Plans for South Korea’s central bank to diversify its $200 billion in foreign-exchange holdings, mentioned in a briefing from the Bank of Korea to lawmakers, didn’t necessarily come as a big surprise. The statement reflected official comments dating back more than a year that the bank was lowering the proportion of U.S. Treasurys in its reserve holdings.
But the publicity garnered by the Bank of Korea document on Monday and yesterday helped revive one of the looming concerns that pressure the dollar: that global central banks, discouraged by low yields and protracted declines in the value of the dollar, could start to reduce their adherence on the dollar as a reserve currency. That, in turn, plays into fears that the U.S. will struggle to finance its huge current-account deficit.