Korea's Won Advances on Intervention Speculation; Bonds Decline

By Kim Kyoungwha and Judy Chen

Aug. 14 (Bloomberg) -- South Korea's won rose, ending a five-day loss, on speculation the central bank will buy the currency to help quell inflation. Bonds fell.

The won gained after approaching 1,040 to the dollar for the first time since July 7, a level that may prompt the Bank of Korea to act, said Lee Yoon Jin, a currency dealer at state-run Korea Development Bank in Seoul. Rising oil and food costs pushed up consumer prices 5.9 percent in July from a year earlier, the biggest gain since November 1998.

``Traders are on high alert against any intervention,'' Lee said. ``Demand for the dollar is still strong from importers and foreign stock sales.''

The currency climbed to 1,037.70 versus the dollar as of 10:11 a.m. in Seoul, compared with 1,039.40 yesterday, according to Seoul Money Brokerage Services Ltd. The won will move between 1,036 and 1,040 today, Lee forecast.

Korean policy makers pledged this week to take action in the market to curb ``undesirable'' one-sided moves in the won and limit the cost of imports.

Central banks intervene in the currency market by arranging sales or purchases of foreign exchange.

Government bonds fell for a fourth day after rising crude oil prices stoked concerns that inflation will accelerate.

``The market may have not fully priced in what will happen in terms of monetary policy,'' said Kong Dong Rak, a fixed- income strategist with Hana Daetoo Securities Co. in Seoul. ``The absolute level of yields is seen low given the lingering risk of higher rates.''

Bonds Decline

Central bank Governor Lee Seong Tae and his colleagues last week unexpectedly raised the nation's benchmark interest rate, saying rising prices 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. The bank next meets on Sept. 11.

The yield on the 5.25 percent note due March 2013 rose 3 basis points to about 5.84 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