Korea Won Rises to 2-Week High; Speculation Central Bank Buying

By Judy Chen and William Sim

July 8 (Bloomberg) -- South Korea's won climbed to a two- week high on speculation the central bank is intervening to strengthen the currency and slow inflation at a decade-high.

The won is up 2 percent this week, its biggest two-day gain in three months, after the Ministry of Finance and Bank of Korea said yesterday they will use the country's $258 billion foreign- exchange reserves to support the won. President Lee Myung Bak yesterday sacked Vice Finance Minister Choi Joong Kyung, in charge of currency policy, after its 9.6 percent slide this year.

``It seems that there was an intervention this morning,'' said Jung Chan Ho, a currency dealer in Seoul at Shinhan Bank, a unit of South Korea's second-biggest financial group. ``The intervention could be $1 billion or more.''

Korea's currency advanced 1.2 percent to 1,030.3 against the dollar as of 11:39 a.m. in Seoul, from 1,043 yesterday, according to Seoul Money Brokerage Services Ltd. The won is the world's best performing major currency in the past two days, and is up the most since March 24-25, according to data compiled by Bloomberg.

The government, which previously advocated a weaker won, has changed its stance as record oil prices push up import costs and widened the current-account deficit.

Central banks intervene in currency markets by buying or selling foreign exchange. The financial authorities bought about $7 billion of won since the end of May to help boost the currency, JoongAng Ilbo newspaper reported July 1. The government doesn't disclose its actions in the currency market.

Export Growth Slowing

South Korea's export growth cooled to 17 percent in June amid a drop in shipments to Europe and after a trucker strike, sparked by rising prices, crippled transport. Global funds sold more local shares than they bought for the past 22 days as President Lee Myung Bak said on July 6 he may lower his economic growth target for the next two years.

Consumer prices surged 5.5 percent in June from a year earlier, the biggest increase since 1998, as crude oil touched a record $145.85 per barrel on July 3. Korea imports almost all of its energy needs. A weakening currency boosts the costs of imports.

``We are still underweight on the won due to oil prices, slowing growth and the current account deficit,'' said Thomas Harr, a senior currency strategist at Standard Chartered Plc in Singapore. ``We will have to monitor the foreign exchange intervention as they could get quite aggressive.''

`Top Priority'

The won will drop 14 percent to 1,200 per dollar this year because ``of the vulnerability of the balance of payments to rising energy prices,'' Peter Redward, head of research for emerging Asia at Barclays Capital Inc., said yesterday. Korea will fail to halt the currency drop with intervention because its economy is slowing and trade deficit widening, Morgan Stanley said the same day.

``The government has set top priority on stabilizing inflation and we will have to manage the foreign-exchange market to meet that goal,'' Choi Jong Ku, head of the ministry's international finance bureau, said yesterday. ``We will use foreign-exchange reserves again if necessary'' to curb the won's decline, he said.

Asia's policy makers have accumulated foreign-exchange reserves since countries in Asia spent most of their reserves to support their currencies in the region's 1997 crisis.

To contact the reporters on this story: Judy Chen in Shanghai at xchen45@bloomberg.net; William Sim in Seoul at wsim2@bloomberg.net.