Korea Won Falls to 6-Week Low on Retail Sales Drop; Bonds Slide

By Kim Kyoungwha and Judy Chen

Aug. 18 (Bloomberg) -- South Korea's won fell to a six-week low after retail sales grew at the slowest pace in five months, adding to evidence that economic growth is cooling. Bonds declined.

Korea's currency weakened for a seventh day as an index that tracks the dollar against six major currencies climbed for a fifth week through Aug. 15, making it harder for the central bank to intervene to halt won declines. A government report today showed sales at the nation's three biggest department stores for July increased 5.9 percent, half the pace in June.

``The global trend of a stronger dollar is behind the won's weakness,'' said Ko Yun Jin, a currency dealer with Kookmin Bank in Seoul. ``Economy wise, the recent data aren't hopeful enough to keep traders buoyant about the currency.''

The currency fell 0.7 percent to 1,046.90 against the dollar as of the 3 p.m. close in Seoul, according to Seoul Money Brokerage Services Ltd. The won has slumped 11 percent this year, the worst performer after the Thai baht among the 10 most-active regional currencies.

Losses in the won also widened as a gain in oil prices helped fuel demand for the dollar from refineries. Crude oil rose for the first time in three days in New York.

``Without any strong intervention, the dollar's uptrend should continue,'' said Kim Sung Soon, a currency dealer with state-run Industrial Bank of Korea in Seoul. ``Importers are settling their deals steadily.''

The won may move between 1,030 and 1,055 this week, he said.

Choi Jong Ku, director general of the finance ministry's international finance bureau, said last week that one-sided moves in the won were ``not desirable.'' Central banks intervene in the currency market by selling or buying foreign exchange.

``Our principle is to take measures in case of any volatility in the currency market,'' Choi said. ``We won't sit idle on the threat of inflation.''

Bonds Decline

Government bonds fell for a fifth day, sending the benchmark five-year yield to the highest in almost a month, on concern that a falling currency will fuel inflation and raise the prospect that borrowing costs will rise.

South Korea sold 1.052 trillion won ($1 billion) of 10-year bonds at an average yield of 6 percent, the Ministry of Strategy and Finance said today. Investors submitted total bids of 1.36 trillion won, or 1.3 times the amount of debt on offer.

Investors ``are loath to participate aggressively due to the rate outlook,'' Kim Do Sung, a futures trader with PB Futures Co. in Seoul, said before the auction.

The Bank of Korea raised its benchmark interest rate to an eight-year high of 5.25 percent this month, saying the fastest inflation in a decade poses a bigger threat than slowing economic growth. Consumer prices climbed 5.9 percent in July from a year earlier, exceeding the central bank's target for a ninth straight month.

The yield on the 5.25 percent note due March 2013 rose 2 basis points to 5.93 percent, according to Korea Exchange. The price fell 0.07, or 7 won per 10,000 won face amount, to 99.60. 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