Korean Won Climbs as Foreign Investors Buy Stocks; Bonds Rise

By Judy Chen and William Sim

July 24 (Bloomberg) -- South Korea's won advanced by the most in two weeks as overseas funds bought more local shares than they sold for the first time in more than a month. Government bonds rose.

The currency rose for a third day as the benchmark Kospi stock index rallied 2.2 percent to the highest level since July 1. Foreign investors, who were net sellers of the nation's equities for 33 days in a row, bought a net 182 billion won ($181 million) of shares today, according to Korea Exchange.

``Foreign investors start buying more stocks as the market becomes stable,'' said Sam Hong, a Seoul-based currency trader at Shinhan Bank, a unit of Korea's second-biggest financial group. ``That tempers demand for dollars.''

The won strengthened 0.7 percent to 1,007.10 per dollar at the 3 p.m. close, the biggest gain since July 9, according to Seoul Money Brokerage Services Ltd.

The local currency has gained 2.7 percent versus the dollar in the past month, making it the best performer among the 10 most-active currencies in Asia outside of Japan, as the government dropped its support for a weaker won.

The Korean won has trimmed this year's loss to 7 percent on speculation authorities will allow gains in the currency to temper inflation. A stronger won lowers import costs while a weaker won boosts the value of exports when converted locally.

`Fair Level'

Finance Minister Kang Man Soo said yesterday the government takes steps when necessary to ensure the won trades at a ``fair level.'' The positive and negative effects of a weaker won will cancel each other out within six months to a year, he said.

South Korea's inflation accelerated to 5.5 percent in June from a year earlier, the fastest pace in a decade, as oil prices climbed to a record. Signs of a slowdown are also emerging in Asia's fourth-biggest economy.

Exports, which make up about half of gross domestic product, rose by the least in five months in June, while factory output had the smallest gain in a half year in May. South Korea's economy expanded 0.8 percent in the second quarter from the previous three months, economists said in a Bloomberg survey before a government report tomorrow.

Government bonds advanced on optimism a slump in oil prices will slow inflation. The commodity has declined 15 percent from its record $147.27 a barrel.

``Investors seem less worried about inflation as oil prices fall,'' said Hong Sung Goo, a fund manager at Daishin Securities Co. in Seoul. ``Speculation that the global financial turmoil will ease is also driving yields down.''

The yield on the 5.25 percent note due March 2013 fell 9 basis points to 5.85 percent, according to Korea Exchange. The price rose 0.37, or 37 won per 10,000 won face amount, to 99.52. A basis point is 0.01 percentage point.

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