Korea, India, Vietnam Currency Interventions May Fail

South Korea, India and Vietnam will fail to halt declines in their currencies by using intervention because their economies are slowing and trade deficits widening, said Morgan Stanley, the second-biggest U.S. securities firm.

Central banks in each of the countries have ``repeatedly'' been buying and selling foreign-exchange this year as their currencies have weakened, Stewart Newnham, a research analyst at Morgan Stanley, wrote in a note to clients. The won, rupee and dong have all fallen at least 5 percent in 2008, threatening to quicken inflation by increasing import costs. Korea, the world's sixth-biggest holder of foreign-exchange reserves, pledged today to take ``stern action'' to stabilize the won.

``Their intervention will ultimately fail,'' Hong Kong- based Newnham wrote in the note, which he confirmed by telephone today. ``The best they can hope for, in our view, is to engineer an orderly decline through a `smoothing operation.' And maybe Vietnam cannot even achieve that.''

The won has fallen 10.2 percent this year to 1,042.85 per dollar according to Seoul Money Brokerage Services Ltd. It is the second biggest loser against the dollar in the period of the 10 most-traded Asian currencies outside Japan. India's rupee has weakened 8.7 percent to 43.165 and the dong has slipped 5 percent to 16,846.50.

Minister Dismissed

Korea's currency snapped two days of losses today, gaining 0.7 percent, after the Ministry of Finance and the Bank of Korea said they will use foreign-exchange reserves to stabilize the won and ``take strong necessary measures if the imbalance seems excessive.'' President Lee Myung Bak today dismissed Vice Finance Minister Choi Joong Kyung, who was in charge of currency policy, as part of a wider cabinet reshuffle.

``By far, the strongest pressure is on the Vietnamese dong'' due to its limited foreign-exchange reserves, Newnham wrote. Morgan Stanley estimates Vietnam's reserves to be $27 billion, India's $302 billion, the world's fourth biggest, and South Korea's $258 billion.

Vietnam will be forced to ``realign'' the dong, Newnham said. Traders are pricing in an 18 percent decline in the coming year to 20,500 per dollar, according to offshore 12-month non- deliverable forwards.

Accelerating inflation has pushed so-called ``real rates,'' which are interest rates accounted for inflation, towards zero or negative levels because ``interest-rate stances are not sufficiently tight,'' Newnham wrote.

Not Credible

Korea's benchmark rate is at 5 percent and Vietnam's at 14 percent, compared with inflation of 5.5 percent and 26.8 percent respectively. India's policy rate is at 8.5 percent, compared with its wholesale price index at 11.63 percent.

``Their interest-rate and exchange-rate policies are not internally consistent for currency intervention to be regarded as credible,'' Newnham said in the note.

Banks in the three countries are ``showing signs of discomfort and this could feed through into foreign-exchange weakness,'' Newnham wrote, citing high loan-to-deposit ratios, a shortage of dollars onshore and property loans.