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By Seo Eun-Kyung
SEOUL, Nov 28 (Reuters) - The Bank of Korea bought U.S. Treasuries from South Korea's National Pension Service on Friday, looking for ways to conserve its dwindling foreign exchange reserves as it battles to defend the sagging won.
Worry that the nation's once-impressive foreign exchange reserves may have already fallen below $200 billion this month have been fanning investor concerns over a new currency crisis similar to the one that rocked South Korea over a decade ago.
The NPS said it would sell $1.1 billion of U.S. Treasuries to the central bank in a bid to boost the country's foreign currency reserves, which have been run down by months of dollar sales in fruitless intervention to support the won.
South Korea's won is Asia's weakest currency this year, having slumped nearly 40 percent as foreign investors liquidated risky emerging economy assets, scrambling to salvage what wealth they can from the credit crunch and global market meltdown.
"Although the dollar supply from the pension fund is not an avalanche, it's better than nothing," said Song Jae-hyeok, an economist at SK Securities, adding the Bank of Korea's scramble for dollars was evidence of its current bind.
"The Bank of Korea is in the position where it has to decide between intervening to defend the won and conserving its forex reserves. If it intervenes those reserves will go down."
Further signs of the pressures on Asia's fourth-largest economy came on Friday as industrial output fell the most in two years in October suggesting the economy is slipping closer to its first recession since the Asian financial crisis a decade ago.
Factory output skidded a seasonally adjusted 2.3 percent in October from September, widely missing market expectations for a 1.3 percent rise and adding pressure on authorities for action to support the sagging economy.
"The output data is really disappointing, signalling that the economy is slipping into a recession, a deep and long one," said Lee Sang-jae, an economist at Hyundai Securities.
"I believe the Bank of Korea has realised how serious the economic conditions are. It might move to cut rates further in December, possibly by 50 basis points."
The Bank of Korea is next scheduled to review interest rates on Dec. 11. It has already cut its benchmark base rate by 1.25 percentage points to 4.0 percent, in an unprecedented series of three moves since early October.
MODEST BOOST
Earlier, Finance Minister Kang Man-soo gave markets a modest boost by saying South Korea's current account was expected to swing into surplus next year from a projected deficit in 2008 of around $10 billion.
But analysts weren't so sanguine about the forecast.
"The current account will post a surplus next year, not because of better exports, but because of reduced imports. The won will continue to remain weak, and this will further pressure imports," said Lee Dong-su, an economist at Tong Yang Securities.
On Thursday, data showed that the capital account in October posted a $25.5 billion deficit, the biggest monthly deficit in history, compared with a $4.78 billion shortfall in the prior month, hit by more outflow related to derivatives.
Friday's BOK purchases show the central bank's determination to squeeze out dollar liquidity from as many sources as it can and follow news on Thursday South Korea would tap a $30 billion swap line with the U.S. Federal reserve to bring in dollars.
The latest official data showed that South Korea's foreign reserves fell by a record $27.4 billion to $212.25 billion at the end of October from September, the lowest level in almost three years as the country injected billions of dollars into the banking system amid the financial crisis.
The foreign reserve declined by a combined $52 billion since the end of March till October as the central bank struggled with a falling won.
South Korea's last recession came during the Asian financial crisis when it went through three straight quarters of negative growth between 1997 and 1998. Since then South Korea has experienced single quarters of negative growth on two occasions earlier this decade.
"With the painful experience of the Asian financial crisis still haunting them, many Koreans are very sensitive to the nation's foreign currency reserve," Song said. (Additional reporting by Kim Yeon-hee and Cheon Jong-woo, Writing by Keiron Henderson, editing by Jonathan Thatcher)