Korean Won Drops to 5-Week Low Amid Dollar Strength; Bonds Fall

By Kim Kyoungwha and Judy Chen

Aug. 13 (Bloomberg) -- South Korea's won dropped to a five- week low on speculation investors will sell the currency for dollars as falling commodity prices support the outlook for U.S. economic growth. Bonds fell.

The won dropped 3.7 percent against the dollar over the past month, prompting Choi Jong Ku, director general of the finance ministry's international bureau, to say yesterday that one-sided moves in the currency are ``not desirable.'' A gauge of dollar moves versus the currencies of six major trading partners yesterday rose for an eighth consecutive day, the longest winning streak since March 2005.

``The global dollar trend is behind the won's weakness,'' said Sam Hong, a currency dealer with Shinhan Bank in Seoul. ``The dollar's uptrend will be maintained should the Korean government stay out of the market.''

Korea's currency fell 0.5 percent to 1,039.40 against the dollar as of 3 p.m. in Seoul, according to Seoul Money Brokerage Services Ltd. That's the weakest the won has been since July 8. Central banks intervene in the currency market by arranging sales or purchases of foreign exchange.

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

The consumer price index rose 5.9 percent in July, the fastest pace in a decade, the government said this month. The benchmark Kospi stock index slid 0.9 percent today, sliding as overseas investors turned net sellers of local shares.

Bonds Decline

Government bonds fell for a third day on concern a weakening local currency will drive import costs higher, stoking inflation. The Bank of Korea last week unexpectedly raised its benchmark interest rate, saying accelerating inflation posed a greater threat than slowing economic growth.

The seven-day repurchase rate was increased by a quarter- percentage point to an eight-year high of 5.25 percent, a move forecast by just six of 19 economists surveyed by Bloomberg News ahead of the decision. The rest predicted no change. Policy makers next meet to set the rate on Sept. 11.

``Traders aren't willing to take positions as the won market is moving unfavorably for bond investment,'' said Seo Chul Soo, a fixed-income strategist with Daewoo Securities Co. in Seoul. ``The risk of higher rates is lingering.''

The yield on the 5.25 percent note due March 2013 rose 2 basis points to 5.81 percent, according to Korea Securities Dealers Association. 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;