Korean Won Completes Biggest Weekly Gain Since 1998; Bonds Fall

By Kim Kyoungwha and Judy Chen

July 11 (Bloomberg) -- South Korea's won had its biggest weekly gain in a decade as President Lee Myung Bak vowed to ``get rid of factors'' in the foreign-exchange markets that are pushing up inflation. Bonds declined.

The won rose 4.8 percent this week, the world's best performer, after the Ministry of Finance and central bank said they would use the nation's $258 billion of foreign reserves to support the currency. Industrial Bank of Korea estimated they spent as much as $7 billion buying the won on July 9 alone.

``Few market participants are willing to run counter to the government that remains so steadfast in stopping the dollar's ascent,'' said Ko Yun Jin, a currency dealer with Kookmin Bank in Seoul. ``Still, there's pent-up demand for the dollar from importers in need of settlements.''

South Korea's currency rose 0.1 percent to 1,002.30 against the dollar at the 3 p.m. close of trading, compared with 1,002.90 yesterday, according to Seoul Money Brokerage Services Ltd. Its weekly advance was the most since March 1998 and trimmed its loss this year to 6.6 percent.

``I will do my utmost to revive the economy, a task which was entrusted to me,'' Lee said in a speech delivered at the National Assembly today in Seoul. ``The government will gradually get rid of factors in the financial and foreign exchange markets that are putting upward pressure on prices.'' Lee dismissed the nation's currency policy chief on July 7, signaling the end of his support for a weaker won.

Finance Minister Kang Man Soo pledged yesterday the government will tackle risks stemming from oil costs and inflation, while Bank of Korea Governor Lee Seong Tae said the bank may intervene if necessary because the currency market ``overreacts.''

`Poor Fundamentals'

Record oil prices caused inflation to accelerate in June to a 10-year high of 5.5 percent, widening the nation's current- account deficit and triggering a truckers' strike.

New York-based Brown Brothers Harriman & Co. recommended buying the dollar at 1,000 with a target of 1,030, citing the nation's weak economic conditions.

``We think Korea fundamentals remain poor, and that foreign-exchange intervention without a supportive rate hike will not have any lasting impact,'' the firm's currency strategists led by Marc Chandler wrote in a note to clients yesterday.

Central banks intervene in currency markets by arranging sales or purchases of foreign exchange.

Local-currency bonds fell for a second day, keeping the benchmark five-year yield near the highest since 2002 on speculation the Bank of Korea will raise borrowing costs.

Governor Lee, after leaving the benchmark interest rate unchanged at a seven-year high of 5 percent yesterday, said the pace of inflation won't slow quickly.

Lee's comments ``turned hawkish,'' DBS Group Holdings Ltd.'s economist Ma Tieying said in a report today. That ``raises market expectations that the Bank of Korea may hike rates in the next few months.''

The yield on the 5.25 percent note due March 2013 rose 5.3 basis points to 6.16 percent, according to Korea Exchange. The price fell 0.16, or 16 won per 10,000 won face amount, to 98.13. A basis point is 0.01 percentage point.

To contact the reporters on this story: Kim Kyoungwha in Beijing at kkim19@bloomberg.net; Judy Chen in Shanghai at xchen45@bloomberg.net;