Korea blinks, rejoins the dollar block

Or so the FT reports. The Bank of Korea seems to have concluded the Korean won was strong enough and bought dollars/ sold won to limit the won’s appreciation. And the Bank of Korea may not have been the only central bank in the market.

It seems that a large number of central banks are pondering their intervention strategy. In effect, they are deciding whether or not to provide the US the financing that does not seem to coming from private market participants right now -- at least not at the extraordinary pace needed to sustain the United States enormous external deficit at current prices of the dollar, and of US assets.

Maybe signals from major central banks that they will resist further dollar depreciation will be enough. I suspect that it is the hope of the ECB/ the Europeans. Maybe they will have to do what Japan did in the spring -- buy enormous amounts of US assets and provide themselves the flows the US needs to finance its external deficit at current interest rates. I still rather doubt Europe wants that particular role, but stranger things have happened. Europe, disappointed at Bush’s relection, nonetheless concludes that it is in Europe’s interest to finance Bush’s deficits ...