Currency policy has some cracks

NEW YORK – Most American investors have never heard of Park Seung, but he might have more influence over your portfolio than you think.

He’s the governor of the Bank of Korea – the Alan Greenspan of Seoul – and a line from a statement issued by his office this past week helped send U.S. stocks to their biggest one-day plunge since May 2003. The suggestion that South Korea might diversify its currency holdings away from the greenback – later retracted – also rattled the bond market, sending interest rates higher and the price of dollar-denominated assets like gold and oil soaring.

The incident underscored the vulnerability of the dollar and exposed cracks in the U.S. currency policy, an issue analysts say is getting harder to ignore. It also suggests that if current conditions persist, more rough trading days lie ahead.

The dollar has served as a reserve currency for much of the world since World War II, but its nearly-three year decline has led many central banks to consider diversifying into other types of money, especially in the face of a more valuable euro. What’s stopping them, analysts say, is that a sharp decline in the dollar would have a cataclysmic effect on the U.S. economy, which could dry up the market for Asian-made goods.