Korean Won Ends 3-Day Drop on U.S. Plan; Bonds Post Weekly Loss

By Kim Kyoungwha

Sept. 26 (Bloomberg) -- South Korea's won rose on speculation U.S. lawmakers will agree on a $700 billion plan to rescue financial firms, reviving investor appetite for riskier emerging-market assets. Bonds were set for a weekly loss.

The currency ended a three-day decline as Finance Minister Kang Man Soo said the government will take pre-emptive steps to tackle a shortage of U.S. dollars in the nation's financial system. U.S. Senate Banking Committee Chairman Christopher Dodd said Republicans and Democrats agreed on a ``set of principles'' for a financial-rescue package.

``The market is pricing in optimism that the U.S. rescue plan will be passed by the Congress, which will help ease a global shortage of funds,'' said Lee Myung Hoon, a currency dealer with Industrial Bank of Korea in Seoul. ``The minister's remarks are also a boost to a market facing a lack of dollars.''

The won rose 0.2 percent to 1,155.75 against the dollar as of 11:13 a.m. in Seoul, according to Seoul Money Brokerage Services Ltd. The currency declined 1.3 percent on the week, taking this year's loss to 19 percent, the worst among the 10 most-active Asian currencies outside Japan.

``The government will check the situation every day and make efforts until the markets return to normal,'' Kang said today, adding there's a ``significant'' dollar shortage in foreign-exchange markets.

South Korea's currency and swap markets are experiencing a dollar shortage as local companies, which expect the U.S. currency to strengthen against the won, don't want to sell their dollars now. The financial crisis is making it more difficult for firms worldwide to secure dollars as bankers hoard cash.

Fund Squeeze

Local-currency bonds headed for a second weekly loss on concern that brokerage firms, squeezed by a shortage of funds, will continue to sell government debt.

``Until concerns over brokerages' funding difficulty eases, the bond market may find it hard to rebound strongly,'' said Hong Sung Koo, a fund manager with Daishin Securities Co. in Seoul. ``Ahead of quarter-end book closing, banks are more cautious about lending.''

Korean companies have held a combined $1.4 billion of risky assets from Lehman Brothers Holdings Inc. and Merrill Lynch & Co., according to data provided by the Financial Supervisory Commission. Lehman filed for bankruptcy protection this month.

The yield on the 5.5 percent note due June 2011 jumped 13 basis points this week to 5.96 percent, according to data compiled by Bloomberg News. A basis point is 0.01 percentage point.

To contact the reporters on this story: Kim Kyoungwha in Beijing at kkim19@bloomberg.net;