Dollar dives and oil soars as Seoul switches reserves

The Dollar tumbled across the board yesterday, pushing oil prices above the $50 mark, as traders scrambled to react to a decision by South Korea to shift reserves away from the US currency.

The Dollar tumbled across the board yesterday, pushing oil prices above the $50 mark, as traders scrambled to react to a decision by South Korea to shift reserves away from the US currency.

The Bank of Korea announced on Monday - a US public holiday - that it planned to diversify its reserves into a greater variety of currencies.

Traders in New York returned to their screens to sell the dollar, which fell almost two cents against the euro. It was down against some 30 currencies, scoring a 22-year low to the New Zealand dollar and a seven-year trough against the Korean won. Adam Cole, a senior currency strategist at RBC Capital Markets, said: "The Korean decision was probably the catalyst but it broke through several key levels and quickly built up its own momentum."

South Korea has reserves of more than $200bn (£105bn), making it the world's fourth-largest holder of dollars. Analysts said its decision fuelled growing speculation that central banks were moving away from the dollar.

Last month a survey in Central Banking Journal found that banks were increasingly looking to lower their exposure to dollar assets. Robert Pringle, its editor, said: "The Korean case very much confirms the trend was indicated by our survey. It means that at the margins they are shifting their reserves to become less dollar heavy than they were."

Park Seung, the bank's governor, told the journal a steep fall in the dollar would make East Asian countries reluctant to buy dollar assets and lead the nations' central banks to reduce their dollar holdings.

The fall in the dollar, which is used to price oil, helped trigger a dramatic jump in crude prices. They jumped $2.80 in New York to $51.15 a barrel, and in London Brent settled at $48.62, up $1.89.

Natural gas prices in the UK surged to a record as temperatures fell below freezing and some North Sea oil companies announced maintenance plans.

Analysts said the markets had been focusing on stocks of gasoline ahead of the summer "driving season" in the US and been caught out by the cold weather. Sharada Selvanathan, an economist at BNP Paribas, said the cold snap had reminded traders that stocks of heating oils were close to historic lows for the time of the year.

Weather conditions in Europe and the US are expected to moderate soon, which would prompt the market to revert to focusing on stocks of US crude and gasoline, currently running 7 to 9 per cent above last year's levels.

Opec moved to calm nerves, saying the higher prices meant it was unlikely it would cut its production quotas at its meeting next month.