Korean Won Falls to 6-Week Low on Dollar Demand; Bonds Decline

By Kim Kyoungwha and Judy Chen

Aug. 18 (Bloomberg) -- South Korea's won fell to a six-week low on speculation importers were buying dollars and after a report that showed retail sales declined. Bonds dropped.

Korea's currency weakened for a seventh day, taking this year's loss to 10.2 percent. An index that tracks the dollar against six major currencies climbed for a fifth week through Aug. 15 to reach the highest since January. Sales at the nation's three-biggest department stores rose 5.9 percent in July from a year earlier, slowing from June's 11.2 percent gain, the Ministry of Knowledge Economy said in Gwacheon today.

``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 0.3 percent to 1,043.40 against the dollar as of 11 a.m. in Seoul, according to Seoul Money Brokerage Services Ltd.

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.''

``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.''

The won will move between 1,030 and 1,055 this week, said Kim Sung Soon, a currency dealer with state-run Industrial Bank of Korea in Seoul.

``Without any strong intervention, the dollar's uptrend should continue,'' said Kim. ``Importers are settling their deals steadily.''

Central banks intervene in the currency market by selling or buying foreign exchange.

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.

The finance ministry is due to sell 1.075 trillion won ($1.03 billion) of 10-year government notes in a weekly auction later today. The sale will attract ``little interest as investors are loath to participate aggressively due to the rate outlook,'' said Kim Do Sung, a futures trader with PB Futures Co. in Seoul.

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 0.06, or 6 won per 10,000 won face amount, to 99.61. 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