Central banks risk diminishing reserves

LONDON: This week's global sell-off has forced central banks from Taiwan to Brazil to step in to defend their currencies, rekindling memories of 2008, when big intervention depleted developing countries' FX reserves by hundreds of billions of dollars.

In the months after the September 2008 Lehman Brothers collapse big developing central banks' reserves fell by up to a third.

Russian reserves fell by more than $120 billion, Indian reserves fell $54 billion while South Korea lost $38 billion amid the 2008-2009 sell-off.

Emerging economies have plenty of ammunition central banks in Brazil, South Korea, India, Taiwan and Russia hold over $300 billion each. But reserves could fall sharply if the pressure does not abate a departure from recent years when the banks scrabbled to prevent their currencies from rising too much.

Central banks that intervened heavily this week include South Korea, which is estimated to have dumped $4 billion on Friday, and Brazil, which auctioned $2.75 billion in currency swaps. Russia twice moved the rouble's trading band on Friday as it stepped up its intervention size to $600 million.

Copyright Reuters, 2011