Korea's Won Falls as Growth May Cool; Bonds Are Little Changed

By Kim Kyoungwha

July 1 (Bloomberg) -- South Korea's won fell for a third day after the central bank said economic growth this year will cool to the slowest pace since 2005 and as global funds dumped local stocks. Bonds were little changed.

The currency traded near the lowest in more than one month as the Bank of Korea said in its semiannual outlook today that the nation's current-account deficit, the broadest measure of international trade, will widen to $9 billion this year from a previous forecast of $3 billion on oil prices. Inflation will quicken to 4.8 percent in 2008, the fastest pace in a decade, while growth will ease to 4.6 percent this year, the central bank said in the report.

``Currency players took a cautious approach till toward the close when some bid for dollars as the authorities stayed out of the market,'' said Ko Yun Jin, a currency dealer with Kookmin Bank in Seoul. ``The pressure is for the dollar to rise given rising oil prices and a stock market fall.''

The won fell 0.1 percent to 1,047 against the dollar as of the 3 p.m. close in Seoul, according to Seoul Money Brokerage Services Ltd. The currency has declined 11 percent this year, the second-worst performer among the 10 most-active currencies in Asia outside Japan.

The won's losses were tempered by speculation the Bank of Korea will allow gains in the currency to cool import prices. South Korea has bought won worth about $7 billion since the end of May to bolster the local currency and slow inflation, JoongAng Ilbo newspaper reported today.

Fears of Intervention

``The market is stuck between fears of intervention and demand for the dollar from oil-related bidders,'' said Jay Won, a currency dealer with Korea Exchange Bank in Seoul. ``The caution is high as the dollar nears 1,050 level.''

The government seems to have intervened in the currency market six times since the end of May including $1 billion of purchases of won on May 24 and an additional $1.5 billion on May 27, the Korean-language newspaper reported, without saying where it obtained the information.

Overseas investors sold $145.8 million more Korean shares than they bought yesterday, taking net sales in June to almost $5 billion, according to data compiled by Bloomberg.

Five-year government bonds were little changed, keeping the benchmark yield near the highest since January, on concern the central bank will raise interest rates to tackle inflation. Consumer prices rose 5.5 percent in June from a year earlier, the most in 10 years, a government report showed today.

`Turn for Worse'

``The inflation outlook is taking a turn for the worse, raising the risk that the central bank may raise borrowing costs,'' said Kim Jong Sung, a bond fund manager with Daishin Securities Co. in Seoul. ``There's little buying interest in debt market.''

The yield on the 5.25 percent note due March 2013 was little changed at 5.96 percent, according to Korea Exchange. The price rose 0.02, or 2 won per 10,000 won face amount, to 98.74. A basis point is 0.01 percentage point.

Bank of Korea Governor Lee Seong Tae left the benchmark interest rate unchanged at a seven-year high of 5 percent in June. Policy makers will meet next on July 10.

To contact the reporters on this story: Kim Kyoungwha in Beijing at kkim19@bloomberg.net.
Last Updated: July 1, 2008 03:00 EDT