Korean Won Falls After Biggest Gain Since 1998; Bonds Decline

By Kim Kyoungwha and Judy Chen

Sept. 18 (Bloomberg) -- South Korea's won weakened, failing to keep yesterday's biggest gain since 1998, on speculation widening global financial turmoil will prompt investors to shun emerging-market assets. Bonds declined.

The currency shed 19 percent this year, Asia's worst performer, as regional shares tumbled. The U.K.'s Lloyds TSB Group Plc may acquire HBOS Plc, people with knowledge of the decision said. CNBC reported that Morgan Stanley is in talks with China's Citic Group and HSBC Holdings Plc over a possible sale. Foreign investors have sold more Korean equities than they bought every day except seven since Aug. 1.

``The U.S. credit crisis is still under way and the won will remain under depreciation pressure due to a shortage of dollars,'' said Chun Chong Woo, an economist with Standard Chartered First Bank Korea Ltd. in Seoul. ``For the time being, the currency market will see big volatility.''

Korea's currency fell 2.9 percent to 1,149.40 against the dollar as of 11:10 a.m. in Seoul, according to Seoul Money Brokerage Services Ltd. The won surged 3.9 percent yesterday, the most since March 1998, after the biggest post-Asian crisis drop of 4.4 percent one day earlier.

Implied volatility for one-month dollar-won options rose to 28.75 percent, the highest since at least 1999, according to data compiled by Bloomberg News. Dealers quote implied volatility, a measure of expectations for future currency swings, as part of pricing options.

Vice Finance Minister Kim Dong Soo said yesterday that South Korea may use its foreign-exchange reserves to provide liquidity to the financial system when needed.

`Some Difficulty'

``We will actively consider providing foreign-currency liquidity to financial institutions through the swap market if necessary by using our currency reserves of more than $240 billion,'' Kim said on KBS radio, adding that the U.S. financial turmoil will have a limited impact on South Korea.

Local-currency bonds fell the most in more than three weeks on concern that a prolonged credit crisis in the U.S. is prompting traders to raise cash by selling government debt.

``Securities firms are having some difficulty securing call money in the wake of the demise of Lehman Brothers Holdings Inc.,'' said Lee Dong Kyu, who helps manage the equivalent of $12 billion in local-currency debt for Hana Bank in Seoul. ``They have some exposure to Lehman and are selling their bond holdings, pushing yields higher.''

Korean companies have a combined $1.4 billion of exposure to Lehman and Merrill Lynch & Co., according to figures from the Financial Supervisory Commission. Bank of America Corp. agreed this week to acquire Merrill for about $50 billion,

The yield on the benchmark bond due June 2011 climbed 18 basis points to 5.72 percent, according to the Korea Exchange. The price dropped 0.43, or 43 won per 10,000 won face amount to 101.95. 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