Korean Won Strengthens on Tumble in Oil Prices; Bonds Advance

By Kim Kyoungwha and Judy Chen

July 30 (Bloomberg) -- South Korea's won strengthened on speculation oil prices below $122 a barrel will temper demand for the dollar from domestic refiners. Bonds rose.

The Korean currency is headed for its biggest monthly gain since January 2006 as policy makers favor a stronger won to help limit the cost of imports. Demand for the currency will increase as exporters are also expected to repatriate overseas earnings before the end of the month, according to Kim Sung Soon, a currency dealer with Industrial Bank of Korea in Seoul.

``The plunge in oil prices is a boon to the Korean won, which combined with month-end export settlements, will put a mild pressure on the dollar,'' Kim said. He forecast the won will move between 1,005 and 1,010 today.

The Korean currency rose 0.1 percent to 1,007.55 against the dollar as of 10:40 a.m. in Seoul, compared with 1,008.80 yesterday, according to Seoul Money Brokerage Services Ltd. It jumped 4 percent this month, making it Asia's best performer among the 10 most-active currencies outside of Japan.

Crude oil yesterday reached a 12-week low of $120.42 a barrel on the New York Mercantile Exchange, before closing down 2 percent for the day at $122.19. It was at $121.90 in after- hours trading, 17 percent below the record $147.27 set July 11.

Bonds Advance

Government bonds gained for a second day on optimism that a stronger currency and falling oil prices will help rein in inflation that rose to a decade high of 5.5 percent in June.

``Debt players are heartened by the favorable mood in the currency and oil markets,'' said Kim Taek Hoi, a fund manager with Hana Bank in Seoul. ``Still, there's some caution against the central bank's possible rate hike next week.''

The Bank of Korea's monetary board, led by Governor Lee Seong Tae, next meets on Aug. 7 to review rates. The bank kept the seven-day repo rate unchanged at 5 percent on July 10.

The yield on the 5.25 note due March 2013 fell 3 basis points or 0.03 percentage point to 5.84 percent, according to Korea Securities Dealers Association.

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