South Korean Won Advances as Government Seeks to Boost Currency

By Judy Chen and William Sim

July 9 (Bloomberg) -- South Korea's won, the best- performing major currency this month, gained for a third day on speculation the government is seeking appreciation to rein in inflation at a decade high.

``The government spent about $1 billion to $2 billion yesterday to support the won,'' said Sam Hong, a Seoul-based currency trader at Shinhan Bank, a unit of South Korea's second- biggest financial group. ``The intervening power came from the coordination between the finance ministry and the central bank. They may come out one or two more times this week.''

Korea's currency climbed 0.4 percent to 1,028.5 against the dollar as of 12:05 p.m. in Seoul, from 1,033 yesterday, according to Seoul Money Brokerage Services Ltd.

Choi Jong Ku, director general of the finance ministry's international finance bureau, said today that South Korea will allow state-run companies to borrow money from overseas to stabilize the foreign-exchange market. The Ministry of Finance and Bank of Korea said on July 7 they will take steps to support the currency after the won slid 10.5 percent versus the dollar in the past year.

``We will allow state-run companies to borrow overseas and let them exchange the dollar into won from the local market,'' Choi said in a phone interview. ``In the past, we prevented companies from borrowing overseas because that would allow the won to strengthen.''

The government has changed its 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.

Stocks, Bonds

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.

``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 that 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 1.5 basis points to 6.08 percent, according to Korea Exchange. The price climbed 0.20, or 20 won per 10,000 won face amount, to 98.40. 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.