First FX domino?

Just as predicted by game theory critics of Bretton Woods II, Korea may be the first to defect from the currency regime, seeking to protect the value of its reserves by diversifying into a basket of currencies. Note, however, that BoK has merely floated this as a proposal to parliament. Korean companies may have something to say about whether the won should be allowed to rise against the dollar. Not long ago at the ASEAN meeting Korean President Roh expressed concern about the rising won and declared pan-Asian currency solidarity. Can the Koreans take the pain necessary to move to a basket?

Bloomberg: "The dollar fell the most in more than four months against the yen and dropped versus the euro, Korean won and at least 30 other currencies after the Bank of Korea said it plans to increase its non-dollar reserves.

South Korea's central bank, which has a total of $200 billion in reserves, said in a Feb. 18 report to a parliamentary committee it will increase investments in assets denominated in currencies such as the Australian and Canadian dollars. The country's reserves are the world's fourth biggest, behind Japan, China and Taiwan, according to data compiled by Bloomberg."

Brad Setser caught this as well.

UPDATE: From Bloomberg this evening, South Korea's central bank, which holds the world's fourth-largest foreign currency reserves, said it has no plan to sell dollars from those holdings and no plan to change the current portfolio of currencies in its reserves.

"The Bank of Korea will not change the portfolio of currencies in its reserves due to short-term market factors," the central bank's said in a press release e-mailed to all media this morning after the Korean won rose past 1,000 against the dollar for the first time since November 1997.

But not before the dollar plunged and US equity markets tanked...