Korean Won Surges 2.7% on Speculation Government Intervened

By Judy Chen and William Sim

July 9 (Bloomberg) -- South Korea's won rose to the strongest two months, the world's best performing currency this week, on speculation the government intervened to strengthen the foreign-exchange rate and curb inflation.

Korea's currency touched 996 today, rising above 1,000 for the first time since April 29, as Choi Jong Ku, director general of the finance ministry's international finance bureau, reiterated the government's pledge to stabilize the won. The Ministry of Finance and central bank signaled on July 7 that they will halt the currency's 11-percent fall with the nation's $258 billion foreign-exchange reserves.

``It seems clear the government made an intervention to show its commitment'' said Jung Chan Ho, a Seoul-based currency trader at Shinhan Bank, a unit of South Korea's second-biggest financial group. ``The intervention today was maybe more than $2 billion.''

Korea's currency climbed 2.7 percent to 1,004.9 against the dollar as of the 3 p.m. close of trading, according to Seoul Money Brokerage Services Ltd. The won's three-day gain of 4.3 percent is the biggest since 1998, according to data complied by Bloomberg.

``The foreign exchange authorities' efforts to stabilize the foreign currency won't stop at this level,'' Choi said in a statement in Gwacheon. ``We will continue to take extra steps until a one-sided expectation for the currency disappears.''

Stance Switch

The financial authorities have changed their stance on foreign-exchange policy as a weaker won has made imported goods more expensive, raising living costs for consumers and production expenses for businesses. Inflation quickened to 5.5 percent in June, the fastest since 1998. Central banks intervene in currency markets by buying or selling foreign exchange.

Choi said earlier today that South Korea will allow state- run companies to borrow money from overseas to and let them exchange dollars for won in the local currency market, in an effort to stem the won's slide.

``In the past, we prevented companies from borrowing overseas because that would allow the won to strengthen,'' Choi said in a phone interview.

Fund managers outside the nation have sold more local shares than they bought every day since June 5. President Lee Myung Bak said on July 6 he may lower his economic growth target for the next two years. The Kospi index of shares has slumped 18 percent in 2008.

`Support the Won'

``The interventions will help slow the won's move, but the country's fundamentals have clearly deteriorated,'' said Yen Ping Ho, a currency strategist at JPMorgan Chase & Co. in Singapore. ``We expect the won to remain weak.''

Government bonds advanced on speculation the central bank will refrain from raising interest rates after oil prices dropped below $140 today.

``Investors seem less concerned about inflation as oil prices fell and the won gained,'' said Chang Jae Heuck, a Seoul-based fund manager at Hana Bank, a unit of South Korea's fourth-largest financial services company. ``They're betting the central bank will keep rates on hold tomorrow.''

The yield on the 5.25 percent note due March 2013 fell 5.2 basis points to 6.07 percent, according to Korea Exchange. The price climbed 0.22, or 22 won per 10,000 won face amount, to 98.42. 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.